Loan Moratorium: EMI relief or a costly deal? Understand the math before taking a loan moratorium..

Loan Moratorium: While a loan moratorium sounds simple, it's not as straightforward. A loan moratorium means the bank allows you to avoid paying EMIs for a period of time. However, this doesn't mean your loan is stopped. Interest continues to accrue on your outstanding loan during this time.

If your home loan EMI is ₹45,000 and you defer it for three months, you aren't saving ₹1.35 lakh. Instead, the interest for these three months will be added to your loan. The result: either your EMI will increase, or your loan tenure will be extended by months or years.

Use it in an emergency.

According to banking and finance expert Akash Verma, a moratorium is like a life jacket; it's a great tool only when you're drowning. If you've lost your job or have a medical emergency, it's a great tool. But if you're choosing it solely for your lifestyle or to have cash on hand, it can prove to be a costly proposition.

When is it wise to take a moratorium?
A moratorium is appropriate when your income has been temporarily affected, such as:

Losing your job.

Business has been halted for a few months.

Payments from a major client are pending.

A medical emergency has occurred.

At such times, it's more important to save cash and maintain your household's financial stability.

A loan moratorium can protect you from defaulting or having to sell your investments.

When can it become a burden?

If your income problem is not temporary but long-term, a moratorium only postpones the pressure. The burden may be greater when EMIs resume.

What to keep in mind?

Higher impact on home loans: Since home loans have long-term tenures, the impact of interest on interest is significant.

Take care of your credit score: Don't miss EMIs without formal approval from your bank, or your CIBIL score could be affected.

Ask for a new schedule: Before taking a moratorium, ask the bank for a revised amortization schedule. See the revised amortization schedule to see how much extra interest you'll have to pay.

How to decide?

Experts say that if your problem is temporary, take a moratorium. However, if there's a permanent imbalance between your income and debt, this option will only delay the problem, not solve it.

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