RBI first announced a 3-month moratorium (March-May 2020) for loans. But with the lockdown continuing and people still facing problems with their finances and loan repayments, RBI recently extended loan moratorium by 3 more months (June – August 2020).
If you are facing problems yourself, then this moratorium (which is now for 3+3 = 6 months) is a helpful thing. It gives you some breathing space. But it costs in the long run. And that is important to understand.
Remember, the moratorium is not an EMI waiver. It’s only deferring the EMIs. More importantly, the interest still continues to accrue during these 6 months. And that adds to the overall interest burden and tenure extension.
I want to highlight how your interest costs will escalate if you opt for the loan moratorium. Let’s take a few examples.
Suppose you have a home loan of Rs 30 lac for 20 years at 9% rate with EMI of Rs 26,992 per month. Now under normal circumstances if you pay regularly, this is the story of your loan:
- Loan Amount – Rs 30 lac
- Interest Rate – 9%
- Tenure (Regular) – 20 years
- EMI – Rs 26,992 per month.
- Total Interest Paid – Rs 34.78 lac (+ principal repayment of Rs 30 lac)
Now let’s bring in the moratorium in the picture.
You opt for the moratorium. That is, you do not pay EMIs for 6 months. With each EMI being worth Rs 26,992, in 6 months you will be saving about Rs 1.62 lac by not paying the EMIs. Right?
But how will it impact the overall loan interest and tenure figures?
It will depend on what stage you are in the loan repayment cycle when you opt for the moratorium.
Let’s take 3 simple cases to understand this aspect:
Case 1: Opt for moratorium at start of loan itself (when no EMIs have been paid)
- Loan Amount – Rs 30 lac (@9% for 20 years)
- Regular EMI – Rs 26,992 per month (for 240 months in 20 years)
- Tenure Completed – Nil (0 EMIs paid)
- Tenure Extension – 41 + 6 months = 47 months
- Total Interest Paid – Rs 44.20 lac (+ principal repayment of Rs 30 lac)
- Extra Interest Paid – Rs 9.4 lac
Case 2: Opt for moratorium after 4 years of loan start (when 48 monthly EMIs have already been paid)
- Loan Amount – Rs 30 lac (@9% for 20 years)
- Regular EMI – Rs 26,992 per month (for 240 months in 20 years)
- Tenure Completed – 4 years (48 EMIs paid)
- Tenure Extension – 28 + 6 months = 34 months
- Total Interest Paid – Rs 40.50 lac (+ principal repayment of Rs 30 lac)
- Extra Interest Paid – Rs 5.7 lac
Case 3: Opt for moratorium after 10 years of loan start (when 120 monthly EMIs have been paid)
- Loan Amount – Rs 30 lac (@9% for 20 years)
- Regular EMI – Rs 26,992 per month (for 240 months in 20 years)
- Tenure Completed – 10 years (120 EMIs paid)
- Tenure Extension – 16 + 6 months = 22 months
- Total Interest Paid – Rs 37.3 lac (+ principal repayment of Rs 30 lac)
- Extra Interest Paid – Rs 2.5 lac
I think the numbers tell everything.
The moratorium comes at a cost. Of higher total interest over the life of the loan and increase in the tenure of the loan (assuming EMI is kept constant and not increased to keep the tenure same). Do read how shorter home loan tenure saves a lot of interest if you don’t have other better options to invest.
This is the mathematics of the loan EMI moratorium.
The above examples can act as an EMI Moratorium Calculator with examples. And it clearly shows how much extra interest you will have to pay if you opt for the 3 month or 6 month EMI moratorium offered by your lender.
Few people had mailed me that they were surprised to find out that by just taking a 3-6 month EMI moratorium, how could the interest burden increase so much? For example in Case 1 above, if you opt for a 6-month moratorium on a Rs 30 lac and a 20-year loan, then your overall interest cost goes up by Rs 9+ lac. And the loan tenure also increases by 3-4 years.
It is surprising but that is how the maths of EMI moratorium is supposed to work. Its is odd if you are a borrower. But can’t help it. Its correct and exactly how loans work. After you pay each month’s EMI, the principal component is deducted from the loan outstanding (after taking out the interest component). But when you opt for the moratorium and don’t pay EMI, the interest continues to accrue and keeps getting added to the outstanding principal. And this increase in outstanding amount compounds over time and as a result, leads to an increase in loan burden and tenure extension.
But please don’t feel that I am saying that moratorium is bad.
It is good for those who need it and are facing cashflow problems due to the lockdown. They will find this moratorium very helpful even if it comes at a cost of increase in the interest burden. Depending on what stage of loan repayment you were in, the burden will increase accordingly. And just to put in the record, opting for EMI moratorium doesn’t have any penalty of adverse impact on your CIBIL score.
And to further highlight how the actual maths of the moratorium works, let me take the earlier example again.
Let’s compare the regular loan amortization schedule with how amortization schedule changes when a 6-month EMI moratorium is opted for.
Below image shows 2 loan scenarios for first 2 years (24 months) of a 20-year loan. The one on left shows repayment schedule for regular EMIs. The one on right shows the repayment schedule when borrower opts for a moratorium of 6 months from 7-12th month. Have a look at the tables below:
As you can see above, the outstanding loan amount remains the same in both cases during the first 6 months, as both pay regular EMIs. But things change after that. Focus on the red box on right side table. It shows 6 months of zero EMIs. But the interest continues to accrue in those 6 months. And this keeps getting added into the loan outstanding. Also there is no EMI being paid of which some part could have gone towards principal repayment. So the loan outstanding grows. And so does its difference with its regular EMI table. This difference is highlighted in the last column.
So what are the options for the borrowers?
A few. But all of them may not work for everyone:
- Don’t opt for a loan moratorium if you can pay EMIs without too much problem. By the way, this is applicable for credit card moratorium as well.
- Ask the lender to keep the tenure same (after moratorium), This will increase the EMI. And you already know what difference between High EMI vs. Low EMI means.
- Keep the EMI same. Tenure and interest burden will go up as explained in the earlier examples.
- If your cashflows (post lockdown) permit, go and prepay all these 3-6 pending EMIs in one go once the moratorium is over. Your tenure and EMI will remain the same with a very little additional burden.
So that’s it. Hope the EMI Moratorium Examples help you understand how it impacts your loan’s interest costs and offers a simple explanation of How EMI Moratorium Math works.
RBI has taken a benevolent view of the borrowers and originally gave a 3-month moratorium on loans up to 31st May 2020. And now, even that has been extended to 31st August 2020. So the total loan EMI moratorium period is now 6 months. But the fact still remains that if you can still afford to pay regular EMIs, then please continue to do so and not opt for the EMI moratorium by RBI in 2020-21 due to the Coronavirus pandemic and lockdown.