The Reserve Bank of India (RBI) in last week has allowed banks to grant a three-month moratorium on loan repayments for dues to be paid between March-May 2020.
While state-run banks have gone for an “opt-out” option (where the repayments automatically get deferred unless a customer informs of her willingness to pay), most private banks have decided to go for the “opt-in” option (the onus is on the customer to inform the bank of their choice to go for the breather).
Here we will discuss the additional costs one has to incur apart from getting their loan payment on halt:
- Option I: One-time payment in June of the interest that accrues in April and May.
- Option II: Add the interest to the outstanding loan and increase EMI for remaining months.
- Option III: Keep the EMI unchanged but extend the loan tenure.
The cost: Explaining the financial burden to its customers, SBI said for a home loan of Rs 30 lakh with a remaining maturity of 15 years, the net additional interest would be about Rs 2.34 lakh equal to 8 EMIs for those opting for the moratorium. For an auto loan of Rs 6 lakh with a remaining maturity of 54 months the additional interest payable would be about Rs 19,000 equal to additional 1.5 EMIs, it said.
The irony: The longer the remaining tenure of your loan, the bigger will be the impact. That’s because the interest accounts for a larger portion of the EMI in the early years and progressively comes down. So, people with older loans taken 10-15 years ago will not feel the burden as much as someone with a new loan taken 2-3 years ago. Ironically, people with older loans may not really need the moratorium as much as those with younger loans.