Should you opt for EMI moratorium?

Recently, Reserve Bank of India (RBI) came up with a regulatory package as Coronavirus is affecting people not just physically but also, financially. With this equated monthly installments (EMI) moratorium, your bank might provide you with an option to defer your EMIs for three months that is until May 31, 2020. So, should you go for this? We shall see it in the following paragraphs. But for now, let us first understand what EMI moratorium means.

What is EMI moratorium?

EMI moratorium is nothing but temporary postponing the EMI (including principal and interest) or credit card dues for the period starting from March 1 to May 31, 2020. However, during this period, the interest would get accrued and the same would be added to your principal. This would either increase the tenure of the loan or the EMI amount. Besides, opting this is not mandatory on the part of the borrower.

Illustration

To get a clear understanding of whether you should choose EMI moratorium or not, go through the example given below.

Let’s say that your outstanding home loan amount is Rs 50 lakh and the rate of interest is at nine per cent and your residual tenure is assumed to be 15 years. So, in normal case, you would be paying an EMI of Rs 50,713 for 180 months.

Now if you avail the EMI moratorium, the interest accrued for three months i.e. Rs 1,12,500 would get added to your principal outstanding, which in our case, is Rs 50 lakh. Therefore, post the moratorium period, the total loan outstanding amount would be Rs 51,12,500. With this, now you have two options. Either you pay an increased EMI keeping the same tenure or increase the loan tenure by keeping the same EMI, which was prior to the moratorium.

In our example, the increased EMI works out to be Rs 51,854 and increased tenure would be 189 months. So, if you opt for increased EMI then, you would be paying an additional amount of Rs 1,141 per month for 180 months. And if you opt for increased tenure then, you would be paying EMI for nine additional months. In both the cases, you would be shedding Rs 2.05 lakh of additional amount.

Conclusion

Now the paramount question is, whether you should opt for it or not. Looking at the above illustration, it doesn’t make any sense to opt for the EMI moratorium scheme. One should only opt for this scheme if he/she is not receiving adequate monthly pay to cover for basic expenses plus EMI. For those who are receiving the complete pay, it is recommended not to opt for this scheme.