Should you opt for the 3-month EMI moratorium?

Don't opt for the moratorium unless critical, advises Charlie Lee, founder and CEO, True Balance.
Here's why:

The Reserve Bank of India recently announced a three-month moratorium to ease out the financial burden faced by people due to the COVID-19 pandemic.

The relief package (moratorium) covers loan EMI payments, bullet repayments and credit card dues.

The moratorium is for payments of all EMI payments due between March 1, 2020 and May 31, 2020.

It is pertinent to note that while the payments have been allowed to be deferred, the interest will continue to accrue on the outstanding amount during the moratorium period.

The loan deferment has been welcomed by many borrowers looking to ease any cash-flow issues. However, it is important to weigh the pros and cons before any individual or business opts for the waiver.

Here's what can happen, if:

You don't opt for the moratorium

Paying regular EMIs is always a healthy financial habit as you will be finishing your EMIs on time, saving money in the long run, and won't have to pay extra money for the accrued interest on the unpaid amount due to moratorium.

Therefore, choose not to opt for the moratorium unless it is inevitable. Life will continue as usual.

You opt for the moratorium

The benefit of choosing the loan moratorium is the immediate financial relief at this time of crisis.

There is also the additional time you get to build your finances. However, while your credit score will not be impacted during the period when you take the moratorium, it makes your loan expensive.

Deferral of payments doesn't mean that you get a payment holiday -- the payments are only allowed to be delayed, with conditions applied.

You still have to pay the EMIs regularly from June onwards.

Opting for the moratorium also means that you as a borrower will not be blacklisted in case of non-payment of the two remaining EMIs of April and May, but the interest charged for the unpaid amount may extend your loan by a few months.

Essentially, the three choices available for borrowers are:

• Pay the entire EMIs along with the accrued interest along with the June EMIs
• Outstanding loan adds the accrued interest to it, increasing the EMI for the remaining months
• EMI stays unchanged, but the loan tenure extends depending on the age of the loan

So, how should you make up your mind?

Postponement is not a waiver

Much depends on the age/tenure of the loan. The interest accounts for a significant portion of your EMI in the early years and progressively goes down.

For example, interest accounts for a majority portion of your EMI amount in the first few years. Towards the end of the loan however, the interest accounts for as low as 10 per cent. Therefore, higher the amount, more the interest to be paid.

This implies that borrowers with older loans shouldn't feel the stress of availing moratorium as much as someone who took the loan a couple years ago. 

Regardless of your choice, you should check the policy of the lender given few of them are planning to offer this benefit to non-salaried borrowers.

As far as businesses are concerned, those facing cash flow mismatches and disrupted supply chains will definitely be benefited by the breather.

This is especially true for the sectors that have grounded to a halt and been impacted the worst, as they can use this relief to stay afloat.

Opt for it solely as a hail-mary throw

For borrowers facing a large outstanding debt, it is not easy to pay it all at one go. The moratorium benefits them with some time to survive through this crisis.

For borrowers who can afford to pay their EMIs, it is recommended that they do not stop their EMIs unnecessarily.

Given paying your EMIs on time improves your credit score, you have maximised chances of getting another loan when you need it the most.

It is also understood that some lenders are offering cash-back to the borrowers who repay during this time. A considered view, therefore, has to be taken.

As the COVID-19 crisis unfolds, we as Indians need to look for the wisdom and ethos of saving money from the prodigious Warren Buffet: Do not save what is left after spending, but spend what is left after saving. And don't opt for the moratorium unless critical.

Charlie Lee is founder, CEO, True Balance India, a wholly-owned subsidiary of Balancehero Company Private Ltd, Korea, which runs the mobile app True Balance. He can be contacted at ga@rediff.co.in