What to know about Moratorium Period as a Borrower.

A With the country being in lockdown to contain the spread of Covid-19, you need to know how to approach your lender in order for you to keep your good credit history
A moratorium period, the technical term for a repayment holiday, is basically a length of time during which a borrower gets time-off from his or her loan repayments. That is, you as a borrower need not start paying your instalments or interest dues if you are granted a moratorium.

Why is it important?

Moratorium period effectively allows a borrower to postpone repayment of liabilities and help in planning his/her finances better. As a practice, banks and other financial institutions offer moratoriums to students taking education loans. As there might be a time lag between students completing their studies and getting a job, student loans usually a built-in provision for repayment holiday.

Similarly, some lenders offer moratoriums on home loans as well. For instance, SBI’s flexi home loan allows customer to pay only interest in the initial 3-5 years, after which flexible EMI payments begin. But in the current situation, banks are allowed to offer moratoriums on all kinds of loans for three months, without any such delay or default counting as a default or bad loan. Similarly, if you are running a business, in respect of working capital facilities, lending institutions are permitted to defer the recovery of interest applied (cash credit/overdraft) for this moratorium period.

While such repayment holidays are offered to give relief to the borrower, they come with a downside as well. Let’s consider the case of the current moratorium. While borrowers are not required to pay EMIs ( An equated monthly installment (EMI) is a fixed payment amount made by a  borrower to a lender  at a specified date each calendar month )or interest till the end of moratorium period, the interest will continue to accrue on their loan amounts. Effectively, folks who avail of the moratorium will end up paying extra interest to the bank.

Why should I care?

If you are among the individuals whose income has taken a hit due to the virus outbreak and the impact of the lockdown, then the moratorium may be a godsend. Your non-payment of interest or principal amounts during the period (base on the agreement) will not be considered as a defaults and will not affect your Credit history score. However, the interest accrued during this period can come back to pinch your pocket when the moratorium ends. The interest can be particularly high for personal loans and credit cards.

 However, borrowers need to check with their bank on the exact interest calculation and other terms and conditions.

The bottomline

Moratorium is only a reprieve and not a waiver. Ultimately, you’ve got to foot the bill. 

Copy of the Draft Letter to the Bank for Deferment of Interest, EMI & Term Loan Repayment:

It is important for any loan if you have availed.  Many banks are yet to come out with automatic deferment of EMI, for any kind of Term loan, Home loan, Loan against property, Business loan, Credit card, Bullet repayment or Interest on cash credit.

Hence, I am recommending for sending the deferment request to your bankthrough email. The draft format for the same could be on following lines*:

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To,

Manager,

Xyz Bank Ltd

Address

Subject: *Deferment of Loan EMIs for Loan A/c #*

Dear Sir/Madam,

We are enjoying Credit Facility with your Bank viz Loan A/c No. #

However, due to nationwide lockdown and spread of COVID – 19 it has become difficult to continue regular and routine business activities.

Therefore, we request you to grant us three months’ moratorium period in our loan tenure starting from the EMI due in April and also for the months of May and June. We will start paying the EMIs from July onwards as usual and undertake to pay the 3 months Monotarium EMIs through an extended Tenure by three more months. It may be that the RBI has already announced the deferment option in all such cases.

We would be highly obliged if you consider this for us to have good business relationship.

We request you to please acknowledge and confirm the above.

Kindly note, we assure regular loan repayments as we have been doing in the past and appreciate your support extended to us for fighting the crisis that COVID19 pandemic has created.

Regards

Abc.

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Hope you find this helpful,

thks & rgds –

credit- bankrate,bloombergquint