RBI has allowed EMI holiday to give relief to many borrowers amid coronavirus outbreak. While many need this support desperately, others can afford to continue paying their EMIs. But, interestingly, many lenders have not given the default option of continue paying EMIs.
Most borrowers are looking for clarity if there is any cost involved in this EMI holiday or is it supported by government subsidy. And if there is a cost, what are the options in front of borrowers to minimise impact.
Moratorium is not an EMI waiver
The first moment of truth borrowers must face is that moratorium is not free of cost. "Borrowers have to understand that the moratorium is not a loan waiver, but only a shift in EMI payment schedules. Interest will continue to accrue if a borrower opts to go for the moratorium, and they will have to pay this additional interest along with regular payments when their EMIs resume in June," says Kunal Varma, CBO and co-founder MoneyTap. Therefore the more EMIs payments you skip, higher the cost.
Cost is very high for long-term loans
Bigger the loan amount, higher will be the cost of EMI holiday. "For the 3-month moratorium period, simple interest will be charged on the outstanding amount for each month at the same rate as the customer's current loan. In this case, any loan will become expensive as compared to the current payment schedule," says Varma of MoneyTap. If you have high amount long-term loans like home loan and auto loan then the cost of repayment will be accordingly higher.
Opt-out if possible
The best way to avoid this cost is to not stop paying EMIs. "I recommend that borrowers take the moratorium only if absolutely necessary. While it may give them temporary financial relief during COVID-19, they will end up paying additional interest at the end of the moratorium period. If they are comfortable paying the EMIs as scheduled, it is definitely the cheaper and easier option," says Varma.
Most of the lenders are giving options to borrowers to contact them and give their consent for regular deduction of EMIs. Many others are giving EMI holiday only when the borrowers contact else they are deducting the EMIs. "Lenders extend moratorium option either by default or as an 'on demand' option. Consider opting out of the moratorium facility if you have sufficient cash flow to pay off your EMIs during the moratorium period. You may do so by directly reaching out to your lender," says Naveen Kukreja, CEO and Co-Founder, Paisabazaar.com.
There are many lenders who have gone for default EMI moratorium and not asked borrowers. Some have given the option to borrowers to contact the bank and allow EMI deduction. But many borrowers are unaware, so they have not availed the option. Meanwhile, others who want the waiver have seen their EMIs deducted before their consent to pay regular EMI was processed, which typically takes about 7 days. In such a scenario partial prepayment is one of the best options you can exercise.
"If your request to opt out (of moratorium) is denied, you can also consider prepaying your loan as doing so would help reduce the overall interest cost of the loan. You must closely follow any communication received from the lender pertaining to moratorium, or contact them directly to have better clarity on developments," says Kukreja. As there is no prepayment penalty on floating rate retail loans like home loans therefore borrowers will not incur any additional cost for doing so.
When there is no option to opt-out or prepay
If the lender has not given you the option to pay or you are not in a position to pay right now but can afford the same in June then the best option will be to pay the accrued EMIs with additional interest immediately after moratorium ends. Our table clearly shows that paying in June will be least costly option if you go for EMI moratorium for the months of April and May.
There are many auto loans which are under fixed interest rate and hence any partial prepayment may have penalties. If your lender is not giving you an option to opt out of moratorium on such a loan then again the best option would be to pay the additional interest just after the EMI holiday.
However, if you are not in a position to clear the accrued interest after the end of moratorium then you will have to choose between the increase in EMI and the extension of tenure. "Borrowers can choose to retain the existing EMIs and extend the loan tenure or they can choose to pay higher EMIs and retain the existing loan tenure," says Varma.
Also read: Coronavirus loan moratorium - how to pause, continue or get refund for EMIs
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