How to decide if the RBI moratorium works for you


How to decide if the RBI moratorium works for you

By Chirag Heda · · 5 min read

It’s week three of SIMS 2020 the lockdown and some of us are enjoying the perks – more time at home, lesser laundry, “house parties”, and almost zero traffic.

Some gifts though, are a little more surprising. Like the RBI allowing you to not pay off your loans for the next 3 months! In fact, your typically slow and spammy bank probably wrote to you immediately saying it’s “pleased to extend you this service gesture.” Praise the Lord!

Ah, but there’s more to the RBI moratorium than meets the eye. This is simply a grace period – a deferment of payments – not a waiver. Here’s what that means.

Out of the frying pan, into the fire

To help cope with the sudden & unexpected impact of the pandemic, the RBI directed financial institutions (banks, credit card companies, NBFCs) to offer a three-month moratorium on EMIs. While this short-term measure can ease cash flow without impacting their credit score, its long-term implications are less obvious. 

You know why “there’s no such thing as a free lunch”? Because there’s no such thing as free money. While the banks will not collect EMIs, they will, however, add the unpaid interest in this period back to the principal. 

This means that while you won’t pay anything for the 3 months, your outstanding loan amount will be higher after the moratorium, which in turn means either a longer loan duration or higher EMIs for the remainder of the loan period.

Yooouuu can’t deny that the numbers don’t lie ?

Let’s say you’re buying an iPhone 11 Pro on a loan:

  • Rs.1,00,000 @ 30% interest for 6 months and EMI of Rs.18,155. Total payment due is 18155 * 6 = Rs 1,08,930
  • You haven’t started paying EMIs yet and are considering opting for the moratorium

If you take the moratorium, you wouldn’t need to pay anything for 3 months. But interest will accrue at the same 30% and get added to your loan principal. This means that when you do resume payments, you would have to pay ~Rs 9000 more over the loan period – 8% higher than what you had initially signed up for!

Bottom line: That iPhone is going to make you feel more ?and less ?

Remember, the moratorium only serves as a cash flow relief and not an interest relief. 

If you’re cash-crunched, this facility could offer temporary respite. But if you have the money, you should continue paying your EMIs. Don’t let temporary relief right now increase your burden later!

“What about my credit card bil—.” “OMG NO!”

Seriously. Don’t even think about using the moratorium for your credit card!

Because the higher the interest rate, the higher the moratorium’s adverse impact. And the interest rates on credit cards are too damn high – an eye-watering 3-4% a month. We actually have a whole video explaining this, right here.

Deferring your credit card bills for 2 months could mean cumulative interest upwards of 6-8%. Plus, purchases during the next 2 months would attract interest too. Cherry on the cake – you will then be charged interest on the unpaid interest. Let’s break down the numbers:

(in Rs)
1April bill (for March purchases)30,000
2April purchases25,000
3Interest on unbilled amount – April (@ 3% on 1+2)1650
4May bill (for unbilled April amount 1+2+3)56,650
5May purchases22,500
6Interest on unbilled amount – May (@ 3% on 4+5)2375
7Jun bill (for unbilled May amount 4+5+6)81,525
Additional interest paid on account of availing the moratorium (3+6)4,025

If you’re cash-strapped and unable to pay your credit card bills, we recommend that you: 

  • Convert the outstanding amount into EMIs, or
  • Take a personal loan to settle the bill 

While neither of these options is cheap or ideal, they are significantly better than rolling over the entire credit card bill for 2 months.

Sometimes, things may not be that simple

Maybe credit card bills are the least of your worries. If the pandemic has you assessing what EMIs to defer under the moratorium, don’t worry, we have answers.

Take Mr. A. He makes Rs.1 lakh per month (after tax) and has two loans on:

  • An iPhone loan (Rs.1,00,000 @ 30% interest for 6 months; EMI = Rs.18,155)
  • A home loan (Rs.40,00,000 @ 10% interest for 20 years; EMI = Rs.38,601)

For simplicity, let’s assume neither of the payments has begun yet.

Sure, as a percentage of his income, his EMIs are pretty high. But Mr. A wasn’t deterred, thanks to his steady, well-paying job. Besides, the iPhone loan was only for 6 months! But now, he’s had to take an unexpected 30% pay-cut. His first response? Opt into the moratorium for one of his loans. 

Which one though? The iPhone EMI’s interest rate is way higher than the home loan, but the home loan goes on for way longer! Let’s assess both options:

ParameteriPhone loanHome loan
Loan outstandingRs.1,00,000Rs.40,00,000
Loan tenure6 months20 years
Loan rate30% p.a.10% p.a.
EMI Rs.18,155Rs.38,601
Interest payable without moratoriumRs.8,930Rs.52,64,208
Additional interest with moratoriumRs.9,140Rs.8,08,356
Additional interest / interest without moratorium 102%15%
Additional EMIs to pay off loan after moratorium121
Excess interest as a % of loan9%20%

On taking the moratorium, while the additional interest paid is % terms is much higher on the iPhone (102% vs. 15% on the home loan), when it comes to absolute amounts, Mr. A will pay Rs.8 lakh extra on the home loan versus a measly Rs.9,000 extra for the iPhone. 

That’s Lesson 1: Always do the math and account for time.

Because that’s when you see the effects of compounding – 3 months of interest built up over the duration of the loan adds up to over Rs 8 lakh and 21 EMIs additional all thanks to the hidden element of time. That’s why we recommend viewing the interest in absolute terms and opting into the moratorium for the short term loan.

However, the hidden time element also has an interesting benefit: You can save money on your long-term loans in a recessionary economy. Say hello to ‘Loan refinancing.’

It’s simple: In tough times like these, the central bank reduces rates to spur the slumping economy. Which means you’re likely to see a fall in your lender’s headline rate! In fact, a 1.5% rate cut on Mr. A’s home loan would reduce his EMI by upto 10% or ~Rs.4,000 per month, in the early years of the loan!. Home loan rates are expected to come down in the coming months, you can keep an eye out on them here.

And that’s Lesson 2: Don’t panic. Read, research and try and find a silver lining in tough times.

In summary, while the moratorium will ease your cash flows right now, it will also increase payouts in the months to come. So make your choices wisely. If you’re in a tough spot, our team can help you plan your finances and EMI deferments, and hopefully ease your mind. To talk to us about what this moratorium means for you, click on the chat icon.

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