Moratorium Period: Meaning, Benefits & Examples

What is Moratorium Period?

A moratorium period is a temporary pause on loan repayments granted by a lender. It provides borrowers with breathing space when they are unable to make timely repayments due to financial stress. In India, this concept is widely applied to Home Loans, Personal Loans, Education Loans and Business Loans offering in specific cases.

The moratorium period meaning is often misunderstood as a waiver of payments. However, it is important to note that repayments are only postponed, not cancelled. During this time, no equated monthly instalments (EMIs) are due, but interest on the outstanding amount continues to accrue.

Borrowers usually request a moratorium during emergencies such as loss of income, delays in property possession or health-related challenges. By granting this relief, lenders allow borrowers to focus on immediate priorities without the risk of being labelled as defaulters. Thus, understanding what moratorium period and its implications is essential for effective loan management.

How Does Moratorium Period Work?

Moratorium in banking is a structured process designed to ease repayment pressure. It typically follows these steps:

1. The borrower submits a moratorium request to the lender, stating reasons for the difficulty in repayment.
2. The lender reviews eligibility based on loan type, repayment history and financial circumstances.
3. If approved, the borrower is exempt from paying EMIs for a specific duration, usually ranging from 3 to 12 months.
4. Once the moratorium ends, the borrower resumes EMIs with revised terms.

For example, consider a Home Loan of ₹30 lakh with a tenure of 20 years at an annual interest rate of 8 percent. If the borrower avails a 6-month moratorium, they will not pay EMIs during this period. However, the unpaid interest of approximately ₹1.2 lakh (calculated on simple interest basis) will be added to the loan amount.

This results in either higher EMIs after the moratorium or an extension of the repayment tenure. Thus, while moratorium provides temporary relief, it increases the total cost of the loan.

Interest Accrual During Moratorium – Simple vs Compound Interest

Interest during moratorium is charged even when EMIs are postponed. The way it is calculated has a significant impact on repayment:

Simple Interest:

Interest is calculated only on the principal amount. For example, a loan of ₹10 lakh at 10 percent annual interest will accrue ₹50,000 during a 6-month moratorium.

Compound Interest:

Interest is charged on both the principal and previously accrued interest. This means the loan grows at a faster rate, making it more expensive if the moratorium is longer.

Most lenders in India apply compound interest, which increases the repayment burden. Borrowers are therefore encouraged to make partial payments during the moratorium if possible.

Also Read: Understanding Interest Rates: Fixed vs. Semi-Fixed vs. Floating

Moratorium Period Benefits

The benefits of moratorium period are particularly valuable during financial stress. Some key advantages include:

Financial relief:

Borrowers gain time to reorganise their income without pressure to pay EMIs.

Cash flow management:

It allows redirection of funds towards essential expenses such as healthcare or education.

Protection from default:

By officially postponing payments, borrowers avoid being categorised as defaulters.

Safeguarding credit score:

Since the lender approves the moratorium, the borrower’s credit history remains unaffected.

Flexibility:

Lenders may offer customised repayment options after the moratorium to ease the transition back to regular EMIs.

Moratorium Period Examples in India

Examples of loan moratorium in India help illustrate its practical applications:

1. Home Loan:

A borrower who purchases a flat under construction may not wish to start paying EMIs until possession. In such cases, the lender may allow a moratorium until construction is complete.

2. Personal Loan:

An individual who loses employment may apply for a moratorium of 6 months. This prevents immediate repayment obligations and allows time to secure new income.

3. Education Loan:

Students often enjoy a moratorium until they complete their studies and secure employment. This ensures they begin repayment only when financially capable.

4. Pandemic Relief:

During COVID-19, the Reserve Bank of India introduced a moratorium scheme from March to August 2020. Millions of borrowers benefitted by deferring their repayments during nationwide lockdowns.

Moratorium Period vs Grace Period

Though often confused, moratorium and grace periods differ significantly. The table below highlights the key differences:

How to Apply for a Moratorium Period on Your Loan in India

Applying for a moratorium requires careful planning. The process generally involves the following steps:

1. Review the lender’s moratorium policy and check eligibility.

2. Prepare documents such as loan account details, identity proof and financial statements.

3. Submit an application online via the lender’s portal or offline at the branch.

4. Discuss revised repayment terms with the lender to understand the impact on EMIs and tenure.

5. Maintain records of approval for future reference.

Also Read: Step-by-Step Process for Applying for a Home Loan

Potential Disadvantages of Moratorium Period

While the moratorium offers relief, borrowers must be aware of its drawbacks:

• Accrued interest increases total repayment, making the loan more expensive.
• The repayment tenure may be extended, keeping borrowers in debt for longer.
• Post-moratorium EMIs may rise significantly, straining household budgets.

Tips to Manage Your Loan after Moratorium

Borrowers can effectively manage loans after a moratorium by following these strategies:

• Adjust budgets to account for revised EMIs.
• Consider negotiating repayment terms with lenders to reduce pressure.
• Make partial prepayments even during moratorium to reduce accrued interest.
• Use online financial tools such as EMI calculators to forecast future obligations.

Apply now for a loan.

FAQs

Q.1. Can I pay EMIs during the moratorium period?

A. Yes, voluntary payments are allowed and can reduce the overall interest burden.

Q.2. Is moratorium period mandatory for all loans?

A. No, it is offered at the discretion of lenders and depends on loan agreements.

Q.3. Does moratorium affect my credit score in India?

A. If officially approved by the lender, it does not impact the score. Delays outside this arrangement, however, can reduce the score.

Q.4. Can I cancel or opt out of moratorium once applied?

A. Yes, borrowers may resume EMI payments earlier if they wish to reduce interest accumulation.

Q.5. What happens when the moratorium period ends?

A. Regular EMI payments must restart, and the schedule is revised by the lender.

Q.6. Is interest waived during moratorium in India’s COVID relief?

A. No, the Reserve Bank of India clarified that interest was only deferred, not waived. Borrowers had to repay it later.

Disclaimer:

The contents of this article are for information purposes only and not a financial advisory. The information is subject to update, revision, and amendment and may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject Godrej Capital or its Affiliates to any requirements. Godrej Capital or its Affiliates shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any decisions, financial or otherwise based on the contents and information mentioned. For more information, please visit www.godrejcapital.com.