EMI moratorium: Calculate how much more you will pay

Beware: During the period that you avail of the moratorium, there would be no repayment of interest or principal. Thus, the outstanding will go up substantially for this period as a consequence, says Anil Rego

In March, the Reserve Bank of India announced a three-month moratorium on loan interest/repayments under which lending institutions are 'permitted' to grant a moratorium on instalments between March 1, 2020 and May 31, 2020. The RBI has now extended this moratorium period by another three months till August 31, 2020.

All banks/lending institutions are covered in this scheme and all types are payments are covered: unsecured/agri loans/retail/working capital loans, including credit cards.

Does this mean interest is not payable?

No. In effect, you are only deferring the repayment of your loan. Interest would get be chargeable during this period, and added to principal outstanding.

This additional interest that is accumulated during this period would need to be paid subsequently.

It may be noted that there is no penal interest applicable during this period, nor would there be an adverse impact on credit rating/score for not paying the interest/EMI as per the normal schedule of the loan.

How will availing of this moratorium impact you?

During the period that you avail of the moratorium, there would be no repayment of interest or principal. Thus, the outstanding will go up substantially for this period as a consequence.

This will significantly increase the tenure of the loan and the interest payable, compared to the normal schedule of the loan.

Who should avail of the moratorium?

Individuals and businesses impacted by the economic fallouts from COVID-19 and are facing financial stress as a consequence, are ideally the ones who should avail of this facility.

Businesses and salaried employees working in sectors like aviation, retail, F&B, contracting, hospitality/travel/leisure and other high adverse impact sectors could find this useful, though here is no restriction on any sectors for availing the moratorium.

The lending institution may need to be satisfied that the deferral is necessitated on account of the fallout from COVID-19. This is optional to the financial institution and the process would also vary from one to another.

One can also opt for this measure if one anticipates possible impacts in the future and especially since it is difficult to predict how long it would take for normalcy to return.

Those unaffected, or those who are financially secure, need not avail of this option since it will increase their financial burden. This will only extend the tenure of your loan and increase the overall interest that one pays on the loan.

A few practical suggestions if you need to avail the moratorium

Keep the following points in mind to minimise the impact for you:

1. Avoid availing a moratorium on high cost loans (for instance, credit card outstanding)
2. Those whose salaries/business cash flows are impacted and are extremely stressed on their finances could avail the moratorium. This breather can help you streamline things, build up liquidity and gives you time to work on a plan that would help service your loans after the moratorium expires
3. Those who are uncertain about potential salary/business impacts can also avail this moratorium. They can use it to create a buffer of a few months from their normal payment schedule. This scenario is illustrated in the table below. If you prepay these postponed instalments in 6/12 months, the impact is minimal.
4. Using of the moratorium has a significant negative impact by a substantial increase in interest and also the tenure. In the illustration below, there is a substantial increase in your tenure by 14 per cent; with additional interest of 19 per cent of your initial outstanding in the example below
5. Ideally, one should plan to make partial prepayments as soon as things stabilise so that you restrict the interest cost and its impact on the tenure

Illustration:

Assumptions: Current outstanding is Rs 50 lakh, 15 years remaining on a home loan, and interest rate of 9 per cent.

If you defer your EMI payment for the full six months, the following is the higher payment you would make during the tenure of the loan.

We have also provided various prepayment scenarios, where you pay back the deferred EMIs of those six months to the lending institution after 6-month and 12-month periods:

If this illustration doesn't match your loan tenure, interest rate or net current outstanding, you can find how much more you will pay after the six-month moratorium by downloading this EMI Loan and Impact Assessment Calculator provided by RightHorizons.com.

This file is an excel sheet, which offers a customised report of how much more you will end up paying if you avail the six-month moratorium.

You can fill the fields titled 'Outstanding Loan Amount', 'Interest %', 'Outstanding no. Of months', 'EMI Amount (Approx)', 'No of months EMI is deferred' with your respective numbers and find out the extra amount you will be paying to your home loan lender or credit card company.

This will also give you the additional months for which your loan tenure will continue before you repay the entire amount.

Your report will be displayed in the box titled 'Case based Analysis'.

In summary:

1. If one avails of the moratorium on interest/EMI repayments, there is a substantial increase in interest outgo and also tenure of the loan
2. Hence, if you are not undergoing financial stress, one should NOT utilise the moratorium
3. Do NOT use moratorium for high cost loans like credit card dues. Most banks offer facilities to convert credit card outstanding to loans; these can be availed in extreme situations
4. When normalcy returns, do try and make prepayments on your home loan at the earliest possible date to reduce the interest burden on your loan

Anil Rego is the founder and CEO of Right Horizons, an investment advisory and wealth management firm that focuses on providing financial solutions that are specific to customer needs.