“Some debts are fun when you are acquiring them, but none are fun when you set about retiring them”! So, if under distress you have been forced to borrow, then your aim should be to retire the debt at the earliest to ensure that your repayment sorrows don’t prolong for long. Remember that there’s no such thing as a free lunch or anything that even remotely looks like a free lunch. And, loan moratorium is no different. Moratoriums may give you temporary relief, but may become a cause for permanent pain. What, How? You may ask. So, let’s do a kind of autopsy of the loan moratoriums, and understand how these can be a source of prolonged sorrow & pain for the borrowers.
When the times get tough, it is the wise who become tough and use mind to tide over the crisis, rather than succumbing using heart alone. This holds good even for the loan repayment strategy when unforeseen events, like Covid. In such situations, most take a short-term view and go for any relief that comes their way, without considering the long-term consequences of such short-term relief. Moratorium on loans is one such short-term measure which may have serious long-term ramifications. So, it’s advisable to wisely analyse moratorium with a cool mind, before jumping on the bandwagon.
Let’s first understand what a loan moratorium means. Simply put it is a kind of ‘Unpaid Leave’, where the employer gives leave to the employee, but salary is deducted for the leave period. Similarly, in the case of moratorium you get the leave of not paying EMIs for a specified time, but you have to pay for this leave in the form of extra charges which may be in the form of penal interest. So, a moratorium does not waive off the interest that you have to pay, it just gives you more time to pay that interest. And remember this deferment of your liability has a cost attached to it – that is, it can upset your future repayment plans making borrowing a major cause for sorrowing for you.
In very simple words, moratorium is a temporary relief which gives you a part-time break from paying your regular EMIs. Eventually, like karma, the interest backlog will come back to you, sooner than later. What this means for you? Since you had planned in a particular manner, the burden of repayment would increase later which in turn could impact your own monthly family expenses leading to a chaotic financial planning mess.
Another side effect of moratorium is that it increases the tenure of your loan. If you had planned to pay off your loan in X years pre-moratorium, it may take X+2 years post-moratorium to pay off your loan. Thus, your dream of living a debt-free financially independent life gets delayed by 2 years. This in turn may hit your long-term financial goals for a six.
In view of the long-term consequences of a moratorium, what can I do to avoid it, you may ask. Well, there are ways in which you can save yourself from the allergy caused by the pill of moratorium. One easy way is to keep paying interest by liquidating other investments like SIPs, FDs. RDs, etc. However, while exercising this option you may consider what returns you would get from these investments, and what extra cost you would have to pay for delaying the EMIs by opting for moratorium. Then take a decision based on your calculations. Generally, in most cases, the cost of delaying EMIs is higher than the cost of liquidating investments to keep paying EMIs.
LESSON FOR BORROWERS
Opt for moratorium only in the case of extreme financial distress. If you have the repayment capacity in Covid-like conditions, then you should always continue paying the EMIs. For your long-term financial goals and financial independence, try following the ‘Moratorium on EMI Moratorium’ thumb rule!
