EMI Moratorium: Should You Opt?

22-May Update — RBI has extended EMI moratorium on all term loans by another 3 months till 31-August-2020.

Following RBI’s Covid-19 regulatory package, your bank may have provided you an option to not pay loan EMIs or credit card payment until May 31, 2020. As a borrower, should you opt for this? In this post, let’s look at the impact of opting for the EMI/payment moratorium for term loans (home loans, personal loans, education loans, auto loans etc) and credit cards.

Moratorium is temporary postponement of payment of EMI (including both principal and interest components) or credit card dues for the period from 01-March-2020 to 31-May-2020. Interest will accrue during the moratorium period. The accrued interest would be added to the principal amount which will increase either the residual tenure of the loan or the EMI amount itself.

Terms Loans (Home Loans, Personal Loans Etc)

Once you avail the relief, you may not have to pay any EMIs due until May 31, 2020. However, this is not an interest waiver scheme. The interest on the outstanding loan amount will keep accruing and will be added to the principal when the moratorium ends.

Let’s say your outstanding home loan amount is Rs 50 lacs and the interest rate is 9% p.a. At the end of 3 months, the interest for the 3 months will be added to your loan amount. In this example, the interest will be Rs 1.13 lacs for the 3 months. Yes, that’s how much goes towards the interest from your EMI. Therefore, the loan outstanding at the end of 3 months will become Rs 51.13 lacs.  Even though the RBI package talks about extending the loan repayment schedule by up to 3 months due to “EMI Moratorium”, your EMI can change because of increase in the principal amount. Let’s say, for the above loan, the remaining tenure was 15 years (180 months). EMI shall be Rs. 50,713. If you avail moratorium for 3 months, you avoided paying Rs 1.52 lacs for now.

  1. Keep the remaining tenure same at 180 months, your EMI will increase to Rs 51,862 after the moratorium period. An increase of about Rs 1,150 per month. Over the course of 180 months, this will amount to Rs 2.07 lacs extra.
  2. If you keep the EMI same and change the tenure, you will have to pay 189 EMIs. That’s an increase of 9 EMIs over the original tenure. So, by not paying the 3 EMIs, you must pay 9 more later. By the way, these 9 EMIs are over and above the 3 EMIs (that you won’t pay now but pay later).

In case of a personal loan with outstanding of Rs 5 lacs and remaining tenure of 36 months and interest rate at 12% p.a., EMI would be Rs 16,607.

  1. EMI will go up from Rs 16,607 to Rs 17,110, if you keep the tenure at 36 months. Note that the repayment schedule gets shifted by 3 months if you opt for moratorium. Thus, you will have to pay 36 EMIs of 17,110 each.
  2. If you keep the EMI constant and tweak the tenure (if the agreement permits), you will need 37.3 EMIs to repay the loan.

Credit Cards

The hit will be quite stark here.

After RBI relief announcement, if you do not make the credit card payment, the bank may not report your case adversely to the credit bureaus. However, it will charge a very high rate of interest on the outstanding amount. The annualized rate of interest on the credit cards range from 36-42% p.a. If you have the money at your disposal, why would you want to pay high rate of interest? Remember, you must pay 18% GST on credit card interest.

RBI package is silent on late fees and penalties for credit cards. And these can add up to a lot. While I believe late fee and penalty won’t be applicable, you must seek clarity from your bank about this. By the way, in case of credit cards, you can replicate the relief provided by the RBI by simply making the minimum amount due on your credit card. Once you make the minimum payment, the bank does not charge you any penalty. It won’t report the case to the credit bureaus either. And there is no ambiguity about penalty or late fees either.

It does not end there. If you do not make the payment in full, you won’t get interest-free credit period for any fresh purchases on your credit card. Even for the purchases already made, the interest-free credit period will be reversed, and you will be charged interest from day 1 of purchase.

Therefore, if you avail the relief and continue to make purchase using your credit card, it is a quadruple whammy for you.

  1. You pay interest from Day 1 on existing purchases.
  2. You pay interest from Day 1 on future purchases (until such time you fully settle the bill)
  3. Incur late fees and penalty (perhaps)
  4. Pay 18% GST on all the above

Let’s consider an example. Let’s say your card outstanding is Rs 50,000. If you don’t pay for 3 months, the interest for the 3 months will be Rs 4,636 (3% per month). Add 18% GST. The number grows to Rs 5,470. That’s quite a bit of extra payment. I have not considered any penalties or fresh purchases.

Therefore, unless the lockdown has created cashflow problems for you, you are better off not availing the relief and paying credit card dues in full.

While I understand that the lockdown will affect the cashflows of many of us very hard, you must not avail the EMI deferral if you can afford the EMIs. From the financial planning perspective, it is a wake-up call if you don’t have a few months of expenses in an emergency fund. That’s exactly why you must have an emergency fund in your portfolio. An emergency fund might seem like a drag on your portfolio returns in good times. However, it is during crisis situations such as the current one where you appreciate the true value of a robust emergency fund. Never too late to learn.

At the same time, this virus scare won’t affect everybody the same way. For some, it is a mere temporary issue. For others, the impact can be stretched. It might be fine idea to opt for the moratorium when the lockdown would have medium to long term impact on your cashflows . This might just give you greater breathing space. I trust your judgement.

RBI Moratorium Excel – Excess Payment Calculation

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