What is Loan Moratorium? Meaning, EMI Impact & RBI Rules Explained

The loan moratorium is often considered a relief option when Indian borrowers experience brief financial trouble, such as income loss or unplanned hardship. It is a set period when borrowers are allowed a break from EMI payments without being marked defaulters.

In the article, we are going to discuss these questions: What is moratorium? How does it operate under RBI norms? Why is it important for your EMI moratorium planning?

What is Moratorium?

What is the moratorium meaning in loan? It is basically a payment holiday, a short halt in repayment commitments negotiated between the borrower and lender. It enables borrowers a breathing room in times of low cash flows. The repayment of EMIs or instalments is put on hold, but interest on the outstanding loan continues to accrue.

What is moratorium period? It refers to the pre-decided period during which the EMIs are paused.

Under the RBI's purview, the bank had permitted lenders to provide a moratorium on term loans as a financial stress reliever, most notably during the COVID-19 epidemic.

Understanding Loan Moratorium and Its Impact

After understanding “What is moratorium in loan,” borrowers need to understand the impact it can have.

While it can provide short-term relief, it’s important to understand how it affects the total interest you pay and your EMIs once repayments resume.

Example 1: ₹5 Lakh Personal Loan

Suppose you take a ₹5,00,000 personal loan at 10% interest for 5 years. Your regular EMI would be roughly ₹10,623.

If a 6-month moratorium is granted:

• You skip 6 EMIs of ₹10,600 each.
• Interest continues to accrue during this period, increasing your total interest outgo.
• Once the moratorium ends, your EMI may increase slightly, or the loan tenure may extend, depending on the bank’s policy.

Instead of paying around ₹1,37,411 as interest over 5 years, the total interest may rise significantly due to the moratorium.

Example 2: ₹10 Lakh Personal Loan

For a ₹10,00,000 personal loan at 12% interest over 10 years, your monthly EMI is about ₹14,347.

With a 1-year moratorium:

• You skip 12 EMIs, but interest continues to accrue.
• The total interest paid over the tenure can increase significantly.
• The EMI or tenure will likely be adjusted once repayment resumes.

RBI Guidelines on Loan Moratorium

The Reserve Bank of India (RBI) guidelines on loan moratorium have typically included the following:

Important: Many believe a moratorium means no interest, but that is not true. Interest on the outstanding amount continues to be charged during the pause.

How Loan Moratorium Impacts Your EMI

Let’s look at what happens when you avail a moratorium:

1. Monthly Payments are Deferred

While you are on a pause period, you won't have to make your normal monthly repayments. This will allow you to temporarily ease your cash flow problems and give you a better degree of flexibility over your finances until you resume payment of your regular monthly instalment.

2. Interest Continues to Accrue

During this period, the lender will continue calculating interest on the outstanding loan. Depending on their policies, the accrued interest can either be added to the principal, which increases the total amount owed by the borrower, or it can be spread out over the remaining EMIs, thus increasing the amount due each month going forward.

3. EMIs Or Tenure Can Change

After the moratorium period, you can typically resume repayments in the following ways:

What is Moratorium Pros and Cons

When a Loan Moratorium Helps And When It Hurts

Helps When:

• There is a temporary loss of income
• When encountering urgent expenses that require immediate assistance
• When regular EMIs cannot able to be made due to a lack of funds

Hurts When:

• Because the relief is not needed, deferring payments unnecessarily may create a long-term burden on finances
• The amount of extra interest charged over the deferred payments will create an additional cost that will be significantly more than the original cost of the payments.

Common Misconceptions About Moratorium

What is moratorium? There are some misconceptions around the concept, like:

1. Moratorium Means No More Payments - No!

A moratorium is not a loan waiver. During the moratorium period meaning a specific duration, like 6 months or 1 year, there will be a temporary pause on your EMIs or repayment obligations, not a cancellation of debt.

2. Interest Stops - No!

Interest continues to accrue: Many borrowers assume a payment pause means interest stops, but interest keeps adding up during the moratorium period.

3. Credit Score Improves Automatically - No!

A moratorium does not boost your credit score. It simply prevents negative reporting for missed EMIs during the approved period, as long as the lender’s terms are followed.

4. All loans are eligible for Moratorium - No!

Not every loan or borrower is eligible. Moratoriums depend on lender policy, loan type, and regulatory guidelines.

Conclusion

Moratorium offers a short-term financial relief that can help many borrowers. While a useful option, it is important to remember the correct definition - what is moratorium? It is also crucial to understand the lender’s policy on the moratorium and carefully consider the post-moratorium financial obligations.

Learn more about financial products and borrowing on My Mudra. Use the EMI calculator to estimate your monthly financial liability and make informed decisions.

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