Loan EMI and credit card payment moratorium comes to an end on August 31, 2020. While it is possible that the moratorium will be extended, you can’t be sure until RBI makes an announcement. As a borrower, what should you do? Irrespective of what the Reserve Bank decides, you must have a Plan B. You can’t wait until the last week of August before you act.
If you have not availed the moratorium and nothing has changed on the cashflow or the employment prospect front, you do not have to worry about anything. If you are currently availing the moratorium and cashflow/employment prospects have not improved, then it is a cause of concern. If the moratorium is not extended and you can’t make loan payments, there will be no immunity from credit score damage. This will dent out ability to borrow in the future. Moreover, your interest liability will compound and add to the outstanding loan amount. You will either have to pay a higher EMI or pay for a longer tenure.
What Can You Do?
The best will be to create or augment your source of income. I am not competent to advise you in this matter, but I trust your resilience. I know you will find a way. Alternatively, you can cut down on your discretionary expenses. I am sure you already have. In this post, I will try to address what you can do with your existing assets or cashflows.
The first thing to do is to create liquidity proactively. Don’t just keep waiting until the very end. If you can borrow from friends/family for a few months, ask for their help. If that is not an option, here is what you can do.
#1 Consider Sale of Liquid Assets/ Breaking Fixed Deposits
It is unwise to keep holding onto your stocks and mutual funds when you can’t repay a loan. The same applies to your bank fixed deposits.
If you own gold, consider selling that too. Gold prices have shot up. You will get a good price for the sale too. While I don’t know if the gold price will go up further, I can tell you it is not a good idea to hold on to a liquid investment such as gold while you are struggling to pay your loan. You can extend this argument to your equity investments too.
While it is possible to take a loan against these assets (rather than selling the assets) and create liquidity to meet the expenses, you must note that such loans will create further interest liability. When the reason for the loan is a drop in income (and not an unplanned expense), I am not sure if taking a loan is a good idea.
I understand you may have emotional attachment with some assets (say family jewellery etc). However, this could be a case of false attachment too. For instance, you don’t want to sell a stock since you have held it for 10 years or worse still, you don’t want to sell a stock just because it is in loss. Be pragmatic. Don’t ignore reality. I trust you to make a rational decision here and not an emotional one.
#2 Take Loans Against Less Liquid Assets
To create liquidity, there is an option to take other types of loans. There might be certain assets that may not be easy to liquidate but can provide you loans in reasonably quick time without much paperwork. For instance, loans against insurance policies, PPF etc. Explore these options. Since such loans will take some time for disbursal, apply in advance. The loans against PPF and insurance policies follow a relaxed repayment schedule too. You just have to keep making the interest payment, which will be light on your pocket.
You can explore personal loans too. Personal loans provide quick disbursal but these are expensive and it is difficult to get a personal loan when you are out of job or are working with a reduced salary.
Note that interest is an additional expense. Choose your option wisely.
#3 Move to a Lower Interest Rate
Money saved is money earned.
While you worry about your cashflow concerns, you must not lose sight of your loan interest rate. Many won’t even be aware about the loan interest rate they are paying on their home loans. Interest rates have come down in a big way over the last couple of years. SBI is offering new loans to its best borrowers at less than 7% p.a.
If your home loan is from a bank and the loan is still benchmarked to MCLR or worse still, Base Rate, then the odds are high that you are paying a higher interest rate than you should. Switching to an external benchmark linked rate is a low hanging fruit. And the savings can be substantial. Just look at how EMIs can fall as the interest rate goes down.
| Loan Principal | 50,00,000 | 75,00,000 | 1,00,00,000 |
| Loan Tenure | 20 years (240 months) | ||
Loan Interest Rate | Loan EMI | ||
| 10% | ₹ 48,251 | ₹ 72,377 | ₹ 96,502 |
| 9% | ₹ 44,986 | ₹ 67,479 | ₹ 89,973 |
| 8% | ₹ 41,822 | ₹ 62,733 | ₹ 83,644 |
| 7% | ₹ 38,765 | ₹ 58,147 | ₹ 77,530 |
When cashflow is a problem, you must not ignore this option. Do check with your bank about the process and the cost to switch to the External benchmark loan. I understand contemplating refinance from a different lender is not easy when there is a much bigger concern about your income, but asking your bank is swift and does not require much effort. By the way, this is something everybody must explore, not just who have availed loan EMI moratorium.