Demystifying the Moratorium Loan: What You Need to Know

In the realm of financial solutions, the term ‘moratorium loan’ has been making waves, especially in uncertain times. A moratorium loan, also known as a payment holiday or deferment loan, is a special kind of loan arrangement that allows you to temporarily stop or reduce your loan repayments.

This period of suspension, also known as the ‘moratorium period’ is usually agreed upon by the lender and the borrower. Moratoriums can be very useful during financially challenging circumstances, when making regular loan payments might become a burden.

When is a Moratorium Loan Beneficial?

You can benefit from a moratorium on your loan, if you face any of the following problems:

Financial Hardship

One of the primary scenarios where a moratorium loan comes to the rescue is during times of financial hardship. This could include sudden job loss, medical emergencies, economic downturns, or any other unexpected circumstances that affect your ability to meet your loan obligations.

Temporary Setbacks

If you’re facing a short-term setback that impacts your income flow, a moratorium loan can provide much-needed breathing space. It allows you to regroup, strategize, and stabilise your financial situation without worrying about immediate loan repayments.

Businesses and Entrepreneurs

For businesses and entrepreneurs, a moratorium loan can be a lifeline when facing cash flow issues. It enables them to navigate through lean periods and focus on revitalising their operations without the constant pressure of loan repayments.

Example

Loan Amount: ₹1,00,000

Annual Interest Rate: 6%

Loan Term: 5 years (60 months)

Monthly Payment (without interest): ₹1666.67

Period	Outstanding Balance	Interest for the Month	Payment	Principal Payment	Remaining Balance
Month 1	₹1,00,000	₹500.00	₹1666.67	₹1166.67	₹98,833.33
Month 2	₹98,833.33	₹494.17	₹1666.67	₹1172.50	₹97,660.83
Month 3	₹97,660.83	₹488.30	₹1666.67	₹1178.37	₹96,482.46
Moratorium (Months 4-6)	₹96,482.46	₹482.41	No Payment	No Payment	₹96,964.87
Month 7	₹96,964.87	₹484.82	₹1781.16	₹1296.34	₹95,668.53
…	…	…	…	…	…
Month 60	₹1.73	₹0.01	₹1781.16	₹1781.15	₹0.00

In this case, the moratorium lasted from 4-6 months. In this period, despite the borrower making no payments, the remaining balance did not increase drastically due to the moratorium option.

Points to Consider Before Opting for a Moratorium Loan

Before you take out a moratorium on your loan, it is important to know about the following aspects related to it so that you can make a fully informed decision:

-Accrued Interest

While the suspension of repayments provides relief, it’s essential to remember that interest typically continues to accumulate during the moratorium period. This means that your overall loan amount might increase, although marginally, and the tenure of your loan could extend.

-Total Loan Cost

Due to the accumulated interest, the total cost of your loan might be higher than if you hadn’t taken a moratorium. It’s crucial to weigh the short-term benefits against the potential long-term costs.

-Communication with Lender

Initiating a moratorium loan involves communication with your lender. It’s advisable to discuss the terms and implications thoroughly before making a decision. Some lenders might offer flexible terms to accommodate your needs.

Note: As per the guidelines issued by the Reserve Bank of India (RBI), all banks and non-banking financial institutions (NBFCs) in India are allowed to offer a moratorium on all term loans, including but not limited to personal loans, home loans, and education loans, for the payment of the Equated Monthly Instalments (EMI).

How to Apply for a Moratorium Loan?

Step 1- Contact Your Lender: Reach out to your lender as soon as you realise you’re facing financial difficulties and may need to avail of a moratorium. This could be a bank, credit union, or other financial institution.

Step 2- Understand Eligibility: Your lender will provide information about the eligibility criteria for the moratorium. Eligibility might depend on factors such as your financial situation, the type of loan you have, the reason for the financial hardship, and the lender’s policies.

Step 3- Gather Necessary Documents: Be prepared to provide documentation that supports your need for a moratorium. This could include proof of income loss, medical bills, or other documents depending on the situation.

Step 4- Submit Application: Fill out the necessary application form provided by your lender. This might be available online or in-person at the bank or financial institution.

Step 5- Review and Confirmation: Your lender will review your application and supporting documents to determine if you qualify for the moratorium. This process may take some time, so be patient. Once your application is approved, you’ll receive confirmation from your lender detailing the terms of the moratorium. This will include information about the duration of the moratorium, whether interest will continue to accrue, and how the missed payments will be handled.

Step 6- Follow Instructions: Follow the instructions provided by your lender during the moratorium period. Some lenders might require you to continue making partial payments, while others might suspend all payments for a certain period.

Step 7- Resume Payments: Once the moratorium period ends, you’ll need to resume making regular loan payments as per the agreement with your lender. Be aware of any adjustments in payment amounts due to interest accrual during the moratorium.

Conclusion

A moratorium loan can be a lifeline during times of financial uncertainty or hardship. It provides breathing space and relief from immediate loan repayments, allowing you to focus on stabilising your situation. However, it’s important to carefully consider the long-term implications, such as accrued interest and extended loan tenures. If you find yourself in need of a moratorium loan, open communication with your lender and a clear understanding of the terms are key to making an informed decision. Remember, a moratorium loan can be a temporary solution that empowers you to regain control of your financial journey.

AMIT ARORA

I am a seasoned retail banker with over 21 years of global experience across business, risk and digital. In my last assignment as Global Head Digital Capabilities, I drove the largest change initiative in the bank to deliver the end-to-end digital program with over US$1 billion in planned investment. Prior to that, as COO for Group Retail Products & Digital, I implemented a risk management framework for retail banking across the group.