about 2 months ago
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So we all were celebrating the generosity of the Govt in giving the EMI moratorium.

And now we read the fine line and all are fuming.

The EMI moratorium is a comfort you are getting now for which you pay a higher price later – that in short explains the predicament.

How this works like this – you take the moratorium now, for one, two or three months. Every deferral means the interest that was due on the EMI gets added to the principal amount and the time extends accordingly. So if you take a moratorium for one month, interest of that month plus loan period extension adds on. At the end of the moratorium, you will be paying more than what you started before taking the break.

This moratorium is for three months for all loans/facilities falling due for payment between the period - March 01 and May 31, 2020.  The accrued interest would be added to the principal amount, resulting to increase in residual tenure of the loan. If the loan tenure cannot be extended, the EMI amount will increase.

Suppose Mr.Gupta with a home loan, with a principal outstanding of Rs.50 lakh, with a residual tenure of 180 months decides to go for the moratorium for two months. Then his tenure will go up by 6 months to 186 months, while his EMI outgo will remain the same, his total payable rises by an additional Rs.2,58,914 – his principal amount is now not Rs.50 lakh but Rs.52,58,914 and interest will be calculated on this increased principal amount. Every month you defer, the interest payable will add to the principal amount and your outgo will only keep on rising. The Bank, in this case, where Mr.Gupta opted for an increased tenure, the monthly instalment will be the same but he most certainly ends up paying much more than what he started with. Look at it like this – for getting a 3 month deferral, Mr.Gupta ends up paying three more.

On the other hand, if the loan tenure cannot be extended – Mr.Gupta has to pay up at the same 180 months time frame, then his EMI per month will rise to adjust the additional payment of Rs.2,58,914 and then the multiplier interest rate on the increased principal.

Either way, the bottomline is that you end up owing much more to the banks post this Covid. Assuming that your cash flow gets better, it might help if you prepay and bring down the principal amount but if business continues to suffer then these three months will come to bite you later.

But if caught in a situation where you need this moratorium now or else it become a question of salary payments or survival, then its best to opt for it. But if you are comfortable, there is liquidity or you are a salaried employee, it makes no sense to opt for this moratorium – this is only for those caught in a really tight spot.

The banks are no losers in this; in fact they are big gainers in the long run. That’s somehow always how things work out….

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