A moratorium period is a temporary financial relief period that is offered when one is going through some financial uncertainty due to job loss, medical emergencies, or educational commitments. The moratorium period is quite often misunderstood or misused, and so, here is a guide to explain what a moratorium period is, how it works, its advantages and disadvantages, and when one should avail of it.
What is a moratorium period?
A moratorium period is a legally sanctioned period for a borrower when they are relieved of loan repayment. However, this moratorium of repayment does not imply that the loan becomes interest-free during this window. In many cases, interest still accumulates during the moratorium and is carried forward or paid later.
This relief is generally granted at the beginning of a loan (such as an education loan) or in exceptional situations, such as during the COVID-19 pandemic when RBI allowed banks to grant moratoriums.
When and where is the moratorium period applicable?
Moratoriums are typically associated with:
- Education loans – repayment of which is only done after the course is completed (following a grace period).
- Home loans – especially during the construction phase.
- Personal loans – genuine hardship or by special request.
- Crisis relief strategies – e.g., those employed by RBI or individual lenders in case of economic disturbances.
Key differences between moratorium and grace period
| Key Aspect | Moratorium Period | Grace Period |
|---|---|---|
| Definition | Allows the borrowers to pause loan repayments entirely for a set time. | A short extension to make payments without late penalties. |
| Application | Requires lender approval and formal documentation | Usually automatic and no application is required. |
| Duration | Several months to a few years. | Usually a few days to a month. |
| Interest Accrual | Interest will continue to accrue during this period. | Usually interest-free, depending on lender policy. |
| Credit Score Impact | No impact if pre-approved by the lender. | No impact if payments are made within the period. |
How does a moratorium impact your loan?
While a moratorium provides you with some relief from paying EMI, it does not entirely remove the cost of borrowing. This is what it does to your loan:
- Interest accrual: Interest is accrued on the outstanding principal over the period of non-repayment.
- Increased total repayment: The total burden of the loan rises without post-moratorium prepayments.
- Adjustment of loan tenure: Either the EMI is raised after moratorium, or the loan tenure is increased.
- Potential effect on credit score: In case of non-pre-approval or miscommunication, late payments can be reported as defaults, impacting the credit score.
Interest accumulation during a moratorium
Let’s assume that there is a personal loan of ₹5,00,000 with an interest rate of 12% for 5 years. If a 6-month moratorium is taken:
- Interest during moratorium: ₹30,000 (approx.).
- New principal after moratorium: ₹5,30,000 (estimated).
- Revised EMI: Increases, or the loan period lengthens.
This clearly illustrates that a moratorium does not reduce the cost of the loan; it makes it easier to hold on to in the short run but becomes more costly in the long run.
Advantages of moratorium period
- It provides temporary cash flow relief in times of unexpected financial distress.
- It helps in avoiding default or penalties due to late payments.
- It is a strategic borrowing tool for students with delayed onset of income or first-time borrowers.
Disadvantages of moratorium period
- There is higher total interest due.
- There is an increased repayment burden after the post-moratorium.
- It can delay financial independence or long-term planning.
- If misused, it can harm credit score, unless formally agreed with the lender.
Should you opt for a moratorium?
Use moratorium only when absolutely necessary. It is optimally used when:
- Your earnings are temporarily suspended or indefinite.
- You are either in college or currently unemployed.
- You're faced with unexpected bills due to medical or family crises.
Avoid it if:
- You can manage your EMIs with some budgetary alterations.
- You're only doing it to stall responsibility without any concrete repayment planning.
It is always wise to consult a financial advisor or your bank prior to deciding. A moratorium is not a loophole; it is to be seen as a responsibility. It lets you stay afloat during difficult times only if you use it responsibly. If you're not sure if you should take one and how it will impact on your future payments, FREED can guide you. Discuss it with our counsellors to understand how to be debt-free with or without a moratorium.
FAQs
Q. Does interest stop during moratorium?
No. Unless specifically stated, interest continues to accrue during the moratorium period.
Q. Will my credit score be impacted if I take a moratorium?
Not if it's approved by the lender. But late payments without official approval will trigger negative credit reporting.
Q. Can I request a moratorium at any time?
No. It depends upon the loan agreement and lender's discretion, apart from RBI-regulated periods.
Q. Is moratorium a loan waiver?
No. A moratorium delays repayment with lender’s approval. It will not reduce your loan balance or your interest payments.