The loan moratorium word has gained tremendous attention over the past few months due to the ongoing coronavirus pandemic, loan moratorium was typically used with educational loans but due to this pandemic all types of loans are given a special moratorium period so what exactly this term means well in simple words loan moratorium refers to that period during which the borrower does not has to pay regular interest on the loan rather the interest keeps accumulating and borrower can pay all interest together after the moratorium period ends. In order to understand more about this concept, one should look at some of the advantages and disadvantages of loan moratorium –
Loan Moratorium Advantages
Helpful in Liquidity Crisis
The first and foremost advantage of the moratorium is that it gives instant relief to the borrower from regular interest payments which in turn helps them in tiding over the liquidity crises. Hence for example suppose your monthly EMI is $1000 and you are a salaried individual but due to coronavirus your employer is paying you only half salary instead of full salary than your liquidity position will be very tight and if you have to pay interest on loan also than it will further deteriorate your liquidity position. In simple words just like when we get wounded a small ointment can ease our pain in the same way a loan moratorium is like an ointment which can ease the liquidity crisis pain caused by the pandemic.
Plan the Repayment Better
Another benefit of loan moratorium is that it helps an individual in planning the repayment better because suppose the bank has given you a 6 month moratorium period than you can plan the repayment in a better way. Suppose for example if you have invested money into the stock market and currently, the stock prices are not good than during six months you can look for an opportunity where the prices of stocks rise and you get out of stock in profit and repay the accrued interest of 6 months in one shot.
No Effect on Credit Score
Another benefit of loan moratorium is that it does not have any adverse effect on the credit score of the borrower despite the borrower not paying monthly installments. In simple words, due to the non-payment of regular installments during the loan moratorium period, your future credit score will not be impacted and thus it has no impact on the borrowing capacity of the borrower.
Loan Moratorium Disadvantages
Interest is Not Waived
The biggest disadvantage of loan moratorium is that interest on your loan is just deferred and not waived, hence if you are one of those people who have this misconception that moratorium amounts to interest wavier than you will be disappointed. In simple words just like ointment is a temporary relief for your wound and you will need antibiotics for full recovery in the same way loan moratorium is temporary relief and one will have to pay the entire interest as well as the principal amount to the bank or financial institution.
Increase in Loan Tenure
Another problem with loan moratorium is that non-payment of regular installment will lead to an increase in loan tenure, hence the loan which was to be fully repaid in 10 years may stretch to 11 or 12 years. In simple words, people who want to repay their loan quickly will not like this moratorium because it ends up stretching the loan tenure.
Sudden Burden
While it sounds and looks good that you do not have to pay any interest for a fixed period say 6 months but after 6 months you have to pay 6 months interest together in 1 month which can create a sudden burden on the financial position of an individual. In simple words, it’s like you have to walk 20 miles in 10 days but due to some reason you are not able to walk for 8 days than you have to cover those 20 miles in 2 days which we all know is a tough task to complete.
As one can see from the above that loan moratorium has advantages as well as disadvantages and that is the reason why individuals thinking of taking this should carefully read the above points and then only opt for a moratorium offered by the bank or financial institution.