how loan emi moratorium will impact your future emi's

in march 2020, when the covid-19 pandemic was just starting to spread across india, the rbi offered a loan moratorium choice to borrowers. a loan emi moratorium refers to deferring or delaying one’s loan emi to a later date. this was done to ensure that borrowers do not default due to a possible cash crunch due to the impact of covid-19. nearly one of three borrowers chose to delay repayment on their loans, as per an et wealth survey. however, around 33% of the borrowers who opted for the moratorium did not need it and were in a position to pay their loan emi on time.

while loan moratoriums may seem to be an easy way to skip emis through your loan tenure, they come with a cost and affect your future emis.

let us look at the impact of loan emi moratoriums through a magnifying glass.

as the moratorium was only a pause and not a waiver, the deferment cost does add up in the upcoming loan emi. this is specifically a red flag for loans with high interest or emi rate, loans in early stages, or longer-term loans. this is because interest payments are higher than principal repayments in the initial period of the loan. skipping loan emi in the initial period adds the unpaid interest amount to the loan or adds to the loan tenure if you want to keep the loan emi fixed.

while the impact may not be very prominent if you are well ahead into your loan tenure, you will likely lift the burden of many extra emis if you are in the initial phase.

for example, suppose you borrowed a loan of rs 60 lakh at 8.5% for 20 years (240 months) in february 2020 (that is, after paying 12 emis) and deferred 3 emis in march 2020. in that case, the unpaid interest will compound such that 13 more emis will get added to the loan tenure if you want to keep your loan emi the same as earlier, or your loan emi will increase to rs.53,184 from rs.52,069 if you’re going to maintain the same tenure as earlier. the total cost of missing three emis in terms of interest payable will be rs.2,54,068.

you can calculate the impact of the moratorium on your loan using this emi calculator.

post the moratorium period you would have the option to make the interest accrued during the moratorium period in a lump sum. but, this would just be an unnecessary burden if you can pay your loan emi on time.

this impact is even more amplified for deferring credit card debt, which typically charges a hefty emi rate.

thus, if you do not significantly suffer from a cash crunch and can pay your loan emi on time, it is best to avoid opting for loan moratoriums. this is because, in reality, opting for a suspension only adds to your interest burden or extends the tenure of your loan.