Know Which One is a Better Option for You - Paying EMI or Availing Moratorium?

The Reserve Bank of India (RBI) recently declared a deferment option to financial institutions for three months to fight the challenges coming due to the Covid-19 outbreak. This announcement of RBI benefits borrowers who are facing any cash flow mismatch to service their loans. Let’s understand the details now.

Difference between waiver & deferment:

Deferment means that you don’t need to pay your loans for 3 months and the time will be extended by the same period. The RBI has allowed deferment of EMIs by the financial institution. Banks also have the right (NOT AN OBLIGATION) to allow moratorium of three months. Thus, banks have an option to not allow moratorium. It applies to all term loans such as home loans, personal loans, educational loans, credit cards, etc. But (why you need to evaluate whether you should avail?), the interest will continue to accrue on the outstanding.

Interest Rate:

The interest rate on deferred payment will mostly continue at the same rate as that of the ongoing loan interest rate. It means that deferring a housing loan will attract interest rate of 8-10% whereas, for a credit card the interest rate applicable will be ~24% - 36%.

The lending institution will have a policy for the recovery of deferred payments. Either the accrued interest will be recovered as a bullet payment or the same will be spread across the loan tenure. It will effectively increase the loan EMIs in the future.

As this is a cash flow relief & not an interest relief, every borrower must evaluate their ongoing cash flows. If there is an ability to service the EMIs, it is better to pay the dues rather than increase the burden by way of accrued interest. For credit card users, it is very important that all the dues are paid instead of deferring. Otherwise, it will attract an interest rate of 24-36%.

Firstly, check with your respective bank on whether the option is available and at what terms. As per SBI, it will extend this option to all its customers.

As per RBI, any borrower who avails this option will not be treated as a default. Therefore, there will be no adverse effect on the credit score of the borrower. Thus, in case you wish to avail this option, your credit score will remain unaffected. If there are any queries, please feel free to reach out to your financial advisor.

Source: Financial Express