Loan Moratorium Offers Temporary Relief, but Raises Repayment Concerns

Loan Moratoriums: Understanding the Impact on Borrowers

Key Takeaways

• A loan moratorium allows borrowers to temporarily stop paying EMIs (Equated Monthly Installments), but interest continues to accrue on the outstanding amount.
• A moratorium improves liquidity in the present, but increases cost over the life of the loan, making it a specific tool for managing liquidity during temporary income disruptions.

How a Moratorium Affects Borrowers

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• When a borrower stops paying EMIs for a fixed period, the unpaid interest is added to the loan, increasing the total repayment amount.
• The impact of a moratorium varies by loan type, with longer tenures and larger principals resulting in more significant increases in interest and repayment periods.

When a Moratorium Makes Sense

• A moratorium is beneficial when income disruption is real and temporary, such as job loss, business stall, or medical emergency.
• In these situations, a structured moratorium can prevent default or liquidation of long-term investments.

Important Considerations

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• Borrowers should request a revised amortisation schedule to understand the full repayment impact, including additional interest, extra months, and potential EMI increases.
• Credit reporting is crucial, and borrowers should confirm with lenders how the arrangement will be reported to credit bureaus.
• A moratorium is not a benefit for convenience or mild discomfort, as it increases the eventual cost of borrowing.

Conclusion

• A moratorium is a liquidity management tool that can prevent deeper financial damage during temporary income disruptions.
• Borrowers should carefully consider their situation and request a revised amortisation schedule before accepting a moratorium, and use it as a bridge to prevent default, not a long-term solution.