Personal Loans: Is the moratorium a blessing or a curse? Know how it affects your EMI and interest payments

Borrowers who are finding it difficult to repay their personal loans may consider a loan repayment moratorium, during which they should not make any payments.

It is worth noting that the moratorium affects the loan repayments as interest keeps accumulating and subsequently the consolidated interest has to be paid, thereby pushing up the EMI.

Let us understand how this happens.

Suspension: How it affects EMI

I. During the moratorium period, loan interest will increase unless specifically waived. Accumulated interest is added to the loan principal, increasing the total loan liability.

two. Push loan term: To avoid a sharp rise in EMIs after the moratorium, banks usually extend the loan tenor. Extending the tenor means the borrower will pay the EMI for a longer period.

three. Increased EMI volume: If the bank does not agree to extend the tenor, the EMI amount will go up to account for the accrued interest and the unchanged loan tenor.

Four. Influence: Therefore, the borrower may end up paying more over the life of the loan due to accrued interest. While immediate cash flow pressures have eased, the overall cost of lending has increased.

illustration

Let’s say you want to apply for a personal loan $5 lakhs at 12% interest which you intend to repay within 36 months.

Case 1: No moratorium

The total interest on the loan repaid within 36 months is $97,857. Therefore, the total amount that needs to be repaid is $5,97,857.

Case 2: Suspension

Let’s say you wait six months before starting to repay your loan. Interest will continue to accrue during these six months.

During this period you only pay interest. Therefore, calculate interest according to the following formula:

Interest rate X term X loan amount

(5,00,000 X 12/100 X 6/12 = $30,000).

After six months, the accumulated interest will be $30,000. The total interest is $1,27,857.

Therefore, the total amount that needs to be repaid is $6,27,857.

Personal Loan EMI Calculator

It is highly recommended to use the personal loan EMI calculator to assess the impact of the moratorium on EMI.

When you enter the loan amount, tenor and interest rate in this calculator, you can find out the EMI you need to pay and the total interest you need to pay during the loan tenure.