COVID-19 Personal Loan EMI Moratorium: Don't stop EMIs if you can afford it

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COVID-19 Personal Loan EMI Moratorium: Don't stop EMIs if you can afford it

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Tuesday April 7, 2020 7:44 PM, ummid.com News Network

COVID 19 Personal Loan EMI

The impact of the COVID-19 pandemic caused a major concern for retail borrowers regarding their EMI payment. Hence, the RBI offered a mega relief package where the borrowers will be able to stand the benefit from the policy rate cuts, and a moratorium on all loans.

The three-months moratorium defers the payment of all loan Installments like Flexi loan, home loan and personal loan interest rates starting from 1st March 2020. The measures will benefit especially those whose equated monthly installments (EMI) are due between March 1, 2020, and May 31, 2020.

Loans like Agri Loans (Kisan Gold Card) and Microfinance customers under the Bank’s Sustainable Livelihood Initiative are also eligible. All Corporate, as well as small business owners, are eligible for the EMI moratorium. Considering the coronavirus lockdown the RBI has given borrowers a lifeline to tide over any temporary financial crunch. However, if I have already paid your EMIs and would like to avail the moratorium till 31st May 2020. You can avail of the moratorium benefits on your unpaid EMIs. Opting for EMI during this period will not have any effect on your Credit report or Credit Score.

Go for a short loan tenure

The repo rate cut of 75 basis points from 5.15 percent to 4.4 percent will mean huge savings on interest outgo for retail borrowers, particularly the ones whose home loans are linked to repo rates. All retail floating rate loans sanctioned by banks after October 1, 2019, have to be linked to an external benchmark; it's the repo rate for most banks. The borrowers will be able to benefit from a 75-bps rate reduction when their respective bank or lender resets the rates, which is once a quarter. Banks tend to extend the loan tenure where possible and reduce the monthly installments. However, if you can afford to, it’s best to keep the EMI intact, so your overall interest payable on loan decreases and the loan can be paid off faster.

Even if your loans are linked to banks the marginal cost of funds-based lending rate (MCLR), your rate of interest on the loan will soften, as banks pass on the benefit of a lower cost of funds to you. SBI has indicated that it will take a call on MCLR on April 20. If your bank does not pass on the entire benefit of RBI policy action, look at switching to an external benchmark-linked home loan. Even if the current MCLR and repo-linked interest rates are comparable, the greater transparency makes it a useful proposition for borrowers.

Effects of Moratorium

The moratorium and its implementation have attracted more attention than the substantial repo rate cut itself. It will cover all term loans, including retail loans – home, auto, personal and education – and credit card dues. However, banks and lending institutions are yet to formalize the operations. It will help borrowers who are facing a financial crunch due to the COVID-19 pandemic. Borrowers can get in contact with the bank or their respective lending institutions to avail of this deferment. There might also be a possibility of a board-approved policy in order to extend the moratorium period to those who need flexibility in repaying the loan.

The central bank has made it clear that the interest rate will continue to accrue during the moratorium period. A moratorium is not an interest waiver and it should be treated as a breathing period for borrowers, it is better to pay your EMIs instead of letting your funds idle away in a savings bank account that yields 3.25-4 percent interest on the loan amount. Ultimately, you will have to pay your EMIs after the moratorium period ends.

Clear your credit card dues

As per the RBI rules the credit card dues will be covered under the moratorium flexibility period. However, it has been clearly stated by them that the credit card users should remember that since moratorium merely defers the payment, the payment dues will continue to accumulate interest on the loan amount during the moratorium or until the bills are cleared. While the burden could be manageable for home loan borrowers given the prevailing benign interest rate regime, this may not be the case with credit card users. For personal loan, the interest charged is excessive upwards of 40 percent per annum. The interest rate accrued on your credit card bill would keep growing to an unmanageable amount if you do not make attempts to clear your EMIs.

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