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What is a Loan Moratorium?

Andreas February 20, 2021 2 min read

A loan moratorium is a period of time in which the lender suspends repayment of the loan. This is done to reduce the financial burden of the borrower. The moratorium is a good option for borrowers who cannot afford the monthly EMI. However, the bank will not waive off the EMIs during this time. The unpaid EMIs will be added to the principle amount of the loan, resulting in higher EMIs in July. Moreover, opting for a loan moratorium has tax implications. The loan amount is taxable, so the rate of tax deduction on interest payments will be reduced.

A loan moratorium does not affect the borrower’s credit score negatively, so it is a good option if you are facing financial crisis. It is particularly useful for those on lower salaries, those in the unorganized sector, and small businesses. It provides a break from repayment and helps people plan for a better future.

A loan moratorium can last anywhere from three months to three years. During this time, the interest on the loan is still paid. However, the tenor of the loan will increase. In case of a mortgage loan, the moratorium period will last from three months to six years. Usually, the moratorium period is three years for under-construction properties. However, if you plan to purchase a ready-to-move-in property, you can opt for a shorter moratorium period, ranging from three to six months.

A loan moratorium is not a waiver of the loan; it only delays repayment until a person is able to pay the EMI in full. However, if you’re trying to plan for the future and want to avoid financial hardships, a moratorium might be the best option for you. However, be aware that a moratorium does not impact your credit score. It only delays repayment for those who cannot afford it.

The moratorium offered by the RBI is not a waiver but a deferment of the repayment period for three months. This moratorium applies to loans that have been outstanding as of 1 March 2020. As a result, it doesn’t affect existing loans, but it does prevent banks from charging compound interest on loans.

The moratorium has been extended several times since March 2020. The current extension will end on Aug. 31, but President Biden says he’ll start repayments soon. Although the student loan moratorium has been extended several times in the past, the current one expires on August 31. There are many college graduates who are hoping that the next president will extend it a few more times.

Despite the benefits of a loan moratorium, it’s still a bad idea for the economy. Not only is it expensive, but it’s also regressive. It benefits the rich more than the poor, since students with higher incomes are more likely to be employed after graduation. Also, graduate students’ loans tend to have higher interest rates than undergraduate loans.

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