Personal Loan: Is moratorium a boon or a bane? Find out how it affects your EMI and interest payments

Borrowers who find it difficult to repay personal loans can explore the prospect of a moratorium, a temporary period during which they are not supposed to make any payment.

It is noteworthy that the moratorium affects loan repayment since interest keeps accruing, following which one has to pay the combined interest, thus pushing the EMIs upward. 

Let us understand how this happens.

Moratorium: How it affects EMI

I. During the moratorium period, interest on the loan grows unless it is waived off specifically. The accumulated interest is added to the principal loan amount, thus increasing the total loan liability.

II. Pushing loan tenure: To avoid a sharp spike in EMIs after the moratorium, banks typically extend the loan tenure. The extended tenure means the borrower will pay EMIs for a longer period.

III. Increase in EMI amount: If the bank does not agree to extend the tenure, the EMI amount rises to factor in the accrued interest and unchanged loan duration.

IV. Impact: Borrowers may therefore end up paying more over the life of the loan due to the accrued interest. While the immediate cash flow pressure is eased, the overall cost of the loan rises.

Illustration

Suppose, you want to take a personal loan of ₹5 lakh at 12 per cent interest which you intend to repay in 36 months.

Case I: Without the moratorium

The total interest in case of loan repayment in 36 months would be ₹97,857. So, the total amount that needs to be repaid is ₹5,97,857.

Case II: With the moratorium

Suppose you wait for six months before starting to repay the loan. The interest would continue to accumulate during these six months.

You only have to pay interest during this period. So, follow this formula to calculate the interest:

Rate of interest X tenure X loan amount

(5,00,000 X 12/100 X 6/12 = ₹30,000).

In six months, the accumulated interest would be ₹30,000. And the total interest would be ₹1,27,857.

So, the total amount that needs to be repaid is ₹6,27,857.

Personal loan EMI calculator

It is highly recommended to use a personal loan EMI calculator to evaluate the impact of a moratorium on EMIs.

As you enter the loan amount, tenure and rate of interest in this calculator, you can find out the EMI that needs to be paid along with the total interest that needs to be paid during the loan’s tenure.