What is Moratorium Period and How Does it Work?

A moratorium period is a tenure during which a loan borrower does not have to repay the principal amount but an interest rate is levied during this tenure. This short-term relief is granted to people opting for loans in a financial crisis or opting for a career switch or going for higher studies. Loan-granting institutions adhere to the loan moratorium guidelines laid down by the federal bank of a country. This relief period does not have any negative impact on the credit score of the borrower and helps loan beneficiaries beat their crisis. Let’s delve more into the specifics. 

What is Moratorium Period?

A loan moratorium or moratorium period is a legally authorized period in which the borrower is not obligated to repay the loan. During this time duration, the borrower does not have to pay the principal amount of the loan due to financial hardship or inability to gain any employment. The lender grants a few months to a few years of relaxation to the beneficiary, depending on the loan type and loan repayment policy of the lender. Banks, Non-Banking Financial Companies (NBFCs), and Private lenders define moratoriums for education loans, personal loans, credit card dues, and home loans. 

Also Read: Understanding Margin Money in Education Loan 

How Does a Moratorium Work?

A moratorium period is a relief measure offered by the federal bank of any nation. The lending financial institutions define a loan moratorium for each type of loan to defer repayment. Moratoriums are usually sanctioned in education loans or in response to interim financial crises. Lenders provide planned and emergency moratoriums to loan beneficiaries. The borrowers have to start repaying EMIs immediately after the completion of loan moratoriums. However, banks and NBFCs accrue interest rates on the borrowers. Each lending financial institution has different repayment options because every borrower has varied views on loan repayment. Given below are the different options available:

• Simple Interest
• Equated Monthly Installment (EMI)
• Partial Simple Interest 

Also Read: How to Pay Off Student Loans?

Advantages

The provision of a moratorium period is a great relief for loan bearers as it gives a reasonable period for borrowers to emerge out of liquidity crisis, for home, personal, and other loans, or complete their education, in the case of student loans to study abroad and in the native nation.

Some of the key benefits of this loan repayment relaxation period are as follows:

No Implication on Credit Score

One of the key advantages of a loan moratorium is that it does not hurt the credit score of the borrower. Non-payment of the loan amount in this relaxation period does not reduce the borrowing capacity or Credit Information Bureau (India) Limited (CIBIL) score of the beneficiary. During this time duration, borrowers get a decent window to build and improve their credit scores. This will in turn improve the financial stability of the borrower. 

Strategies Effective and Conducive Repayment Plan

This period can help a loan beneficiary strategies their repayment plan in an effective and stress-free manner. A loan moratorium can also enable borrowers to accumulate the principal amount from multiple sources and start the repayment in a scheduled manner after the conclusion of the moratorium tenure. This period can also be utilised by borrowers to plan their monthly income and expenses, on account of which they can save funds for upcoming EMIs and other necessities. 

Relaxation During Liquidity Crisis

A liquidity crisis or a cash crunch is an unprecedented real-life situation for many people. In this crisis, a loan moratorium proves to be quite beneficial. A loan moratorium is highly advantageous for loan borrowers who have lower salaries, especially those who are employed in the unorganised sector. Temporary relief in loan repayment can help low-salaried borrowers evaluate their financial situation and strategies for a better future. 

No Fine on Non-Payment 

The lender does not charge any penalty or fine on non-payment of EMIs during loan moratorium. A borrower is exempted from all extra and necessary charges during this period. 

Also Read: Education Loan Interest for Different Banks for Education Abroad

Drawbacks

Despite several benefits, there are certain disadvantages of a loan moratorium. Here are some of the drawbacks of this EMI relief period:

• No waiver on the interest rate. Non-payment of interest during the moratorium also increases the interest amount after the completion of this relaxation period.
• The sudden burden of interest amount and principal amount after a temporary break.
• Extension of loan tenure, owing to which the long-term financial goals of the borrower can be impacted mildly or significantly, depending on the type of loan and ability of the borrower to improve his/her/their financial situation. 

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