RBI Moratorium on EMI – Should you opt for it or not?

RBI announced a relief package in March 2020, due to ongoing crisis of corona virus. Under the package, it has given an option to choose moratorium for term loans and credit card payments. First of all, let us understand, what is moratorium and what is term loan?

What is moratorium?

Moratorium means deferment in the re payment of loan i.e. payment of EMI. For example, if you have an outstanding loan of 50 Lakhs at 8.5% rate of interest for 20 years, the monthly EMI would be around 43,391. As per the RBI EMI moratorium, you can postpone 3 EMIs for the month of March, April and May – 2020. It is your choice to postpone these EMIs and it is not compulsory.

The question is – Should I postpone it or should I keep paying my EMIs? Before moving forward, let us understand, what is term loan?

What is term loan?

Term loan is a loan which is repaid over regular interval of time. For example- home loan, personal loan, car loan, education loan etc, comes under term loan category. Though RBI has extended this facility to credit card outstanding also but credit card outstanding does not come under term loans.

Coming back to the question, should I use this opportunity to postpone my EMIs for my loan?

Before taking any decision let us understand the calculations if you postpone your EMIs.

How much additional interest is payable if you postpone the EMIs?

Remember, you will only postpone your EMIs, interest will still be charged for these 3 months. It is not a waiver of interest; it is just postponement of EMIs.

Let us understand this with an example. This is your loan details as on 1^st March 2020.

Outstanding loan – 30 Lakhs

Rate of Interest – 8.50%

Balance Term – 15 Years (180 months)

Monthly EMI- Rs. 29,542

Now let us divide this monthly EMI into principal amount and interest amount

Principal – Rs. 8292 + Interest – Rs. 21,250 = Rs. 29,542 (monthly EMI)

If you postpone the EMI for 3 months, the interest for 3 months would be added back to the principal amount

I.e. Outstanding Loan – Rs. 30 Lakhs + Interest for 3 months delay (Rs. 21,250*3) – Rs. 63,750

= Rs. 30.64 Lakhs

You can check your monthly principal amount and interest amount here

https://emicalculator.net/

After 3 months, your outstanding loan would be Rs. 30.64 Lakhs

You can either increase the EMI or increase the tenure

How much would be the increase in EMI if you keep the tenure constant after moratorium

The new EMI would be Rs. 30,172 assuming the interest rate of 8.5% for 15 years on outstanding loan of 30.64 Lakhs.

This would be an increase of Rs. 630 per month i.e. for a span of 15 years – you would be paying an additional amount of Rs. 630*12*15= 1.13 Lakhs.

How much would be increase in tenure if you keep the EMI constant after moratorium

The new tenure would be 188 months assuming the interest rate of 8.5% on outstanding loan of 30.64 Lakhs. You would be paying additional amount of 2.36 Lakhs.

Tenure difference = 188 months – 180 months = 8 months. You will be paying 8 extra EMIs.

Total additional amount= Rs. 29,542*8= Rs.2,36, 336.

You can check the additional tenure here- https://emicalculator.net/loan-calculator/

In either case, you are going to lose additional amount of money, if you go for postponement of EMIs for your home loan, car loan, personal loan or educational loan.

Who should opt for this moratorium of EMI?

This depends on your present financial position. If you are in a stable job and if you have decent emergency fund, don’t opt for this moratorium. Please continue with your EMIs as usual.

But if you are not in a stable job and if you don’t have enough emergency fund, opt for this moratorium. The 3 months EMI saved can be added to you emergency fund. This can be helpful in times of uncertainty.

Moratorium on Credit Card Payments

Credit card can create problem for you if you don’t handle it carefully. If you are paying full due before due date in a credit card, you are not paying any interest. But, if you don’t pay it, the interest rate can be 36- 40% – yes 40%. That is the interest rate on your credit card payments if you delay the payment. I.e if you delay the payment on credit cards outstanding of 1 Lakh for 3 months. The interest amount would be Rs. 1 Lakh * 40% *(3/12) = 10,000. An additional GST of 18% would also be applicable. Most importantly, you lose the benefit of interest free period i.e. interest on any new purchase would be charged from day 1.

Should I opt in or opt out?

My suggestion is

1. If you are getting your salary/income on time, do not postpone it. Pay it regularly.
2. If there is serious cash crunch, you can use your emergency fund. You can even sell a portion of your gold to manage this situation.
3. If there is no emergency fund and there is a cash crunch, you can use this option as a last resort.

Will this moratorium affect my Credit Score?

No. Even if you opt for this moratorium, it will not affect your credit score.

Can I use the saved EMI to invest in equity to encash the market fall?

There are people who are thinking of using this option and investing the amount in market- Please do not do this. There is no guarantee that markets will go up immediately from here. You can lose your money in both options.

Please let me know if you have any queries regarding RBI EMI moratorium.

Stay home – Stay Safe.