Personal Loan

What is a moratorium period in a personal loan, and why is it used?

Borrow
08-11-2023
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When you get a personal loan, you have to pay back the EMIs over the length of the loan. The time during the loan term when you don’t have to pay back the loan is called the “moratorium period.” Before you start making payments, there is a short break during the payback period. But if you choose a moratorium, the loan will last longer, and interest will be added to the principal balance. This time frame aims to give the customer more financial freedom.

What is a moratorium?

A “moratorium period” is an agreed-upon part of the loan term when the lender is not required to make any payments. It could be seen as the time the lender has before paying back the loan in equal monthly payments (EMIs). When getting a loan, you usually must pay the EMIs from the first day of the loan term until the last day. During the moratorium, the lender will not have to pay any money to the lender. Even if you don’t make any payments, you will still get money on credit. Your loan account will be charged.

A moratorium period is often part of higher education loans. During the moratorium period, the loan applicant, a student, will not have to repay any loan. The loan can be repaid if the student finishes school and gets a job afterwards. The lender will decide on a waiting period that the applicant must follow.

You don’t have to make any EMI payments during a moratorium, so this time is also called an EMI vacation. It is given to people who want to borrow money for student and wage loans.

Because there is a moratorium period, many people choose education loans over personal loans when they need money to pay for school or to go abroad. You won’t be able to use a moratorium period to help with your request for a personal loan. Once a student is in college or university, it might take a lot of work to start paying back a loan immediately. They could start making payments as soon as they start making money.

The main purpose of a moratorium period is to ensure that the person applying for a loan can start making payments.

How will the interest on my loan be worked out during the moratorium?

For simple interest, the outstanding balance of the principle at the time in question is used. When this term is over, your EMI or term (or both) will change as needed, and a new schedule will be made based on how much of the original loan is still owed.

What are the pros of a “moratorium” on a loan?

A better way to pay back

A personal loan moratorium could help a lender plan to repay the loan without stress. They might be able to get money from different places and start paying back the loan instead of rushing to pay with more cash. Lenders can use loan moratorium periods to plan their monthly income and expenses and save money for upcoming EMIs and other costs.

No harm done to credit score:

One of the best things about a loan moratorium is that it doesn’t hurt your credit score. So, a moratorium period does not affect how much you can borrow.

Aids amid a liquidity crisis:

The Covid-19 outbreak was a stark reminder of how much damage a single event can do to the economy. People lost their savings when they lost their jobs or when the main breadwinner in their family died. So, not having enough cash or a liquidity crisis is a big problem for many people. In this case, you might need a loan moratorium to help you get through a tough financial situation.

What are the cons of putting a loan on hold?

No interest-free loan:

One of the biggest problems with a loan moratorium is that interest doesn’t go away; it just gets put off. You still have to pay interest to your bank or other lenders. Moratoria can also cause interest rates to go up, which makes it harder for you to make payments in the future.

Unexpected burden:

Even though a short break from debt payments could be nice, the truth is that the interest on your debt will catch up with you. If you have yet to plan, a sudden load of big payments could also throw off your cash flow plans and monthly budget.

Loan terms getting longer:

Loan terms are always longer when EMI breaks are longer. For example, if you get a moratorium on a loan with a three-year payback term, the term would now be extended to four or five years. Your long-term financial goals could be hurt, and your plans for a stable, debt-free financial future could be thrown off track.

Conclusion

People who are having trouble with their cash flow and want a short break from their problems could benefit greatly from a moratorium. A moratorium must be put in place so that payments made after the moratorium period is over can still be controlled. It is used by people who need money badly and can repay the loan.

If you want to find out more about personal loans, you can visit Piramal Finance.

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