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Opted for a moratorium? Know what the future holds
The Moratorium benefit announced by banks had offered a respite to individual borrowers from paying their loan EMIs and credit card outstanding payments for the March to May 2020 period. It may have been a godsend for those grappling with a job loss or a pay cut. But now with the relief period coming to an end, what should you be prepared for from June onwards?
Since the Moratorium is not a waiver and is only a shifting of the repayment schedule, you must understand that it has an additional cost.
We can understand this with an example:
Akhilesh Singh (name changed on request) had availed of a car loan six months back. The total loan amount was Rs. 6 lakh with an interest rate of 9.5% over two years. This means Akhilesh has to pay an EMI (equated monthly instalment) of Rs. 27,548.70. He also had Rs. 60,000 pending dues on his credit card.
Let us assume that Akhilesh decided to avail of the Moratorium and defer two EMIs on his car loans due in April and May. With the money he saved and some additional amount from his savings (Rs. 55,000 from two EMIs of Rs. 27,548) he paid off his credit card debt.
But his interest component for the car loan EMIs in April and May, about Rs. 7,400 will get added to his remaining principal and attract additional interest. But even after factoring this, his savings are likely to be very substantial, since his credit card dues attract an interest rate of 3.4% per month or 40.8% annually.
[Also Read: Moratorium – What it means and its impact]
What are his options?
- As far his car loan is concerned, Akhilesh has two options while repaying the new principal amount. First is to increase his EMI payment, which may not be viable if there is no substantial increase in his income. But with the credit card outstanding paid off, he should calculate and see if he can afford it.
- The second option is to increase the loan tenure. He can speak to his bank and request for his loan to be restructured so that the EMI amount remains the same and he does not face an additional burden on his monthly expenses. But this will mean that over the extended loan tenure, Akhilesh will end up paying more interest than before. However, he can pre-pay the loan as and when he gets surplus funds.
- He has a third option-to take a secured loan. If he has any investment - Fixed Deposit, mutual funds, bonds, life insurance, or an asset such as gold ornaments, he can use that to take a secured loan. This loan can be used to pre-pay a part of his car loan, so that his EMI is reduced or at least remains at the same level it was before Moratorium and he can continue with regular repayment. A secured loan will be available to Akhilesh at a lower rate than a personal loan, at about 10-14%. This way he can leverage his asset without having to sell or redeem it and also manage his debt.
The long-term plan of action
To make up for the higher interest cost he is incurring, Akhilesh should increase his savings as soon as he can. The first step should be to build an Emergency Fund that will cover 6 to 9 months of essential expenses, including EMIs. He should also increase his regular savings through Recurring Deposit or Systematic Investment Plans in worthy mutual funds to bring his finances back on track.
Disclaimer: The Source, a Mumbai-based content creation, and curation firm have authored this article. Axis Bank does not influence the views of the author in any way. Axis Bank and The Source shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
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