A loan moratorium period is a temporary suspension of loan payments granted by a lender to a borrower. During a moratorium period, the borrower is not required to make any loan payments, and interest may or may not continue to accrue on the loan balance. A loan moratorium period is typically granted to borrowers –
- Experiencing financial hardship, such as a loss of income or unexpected expenses, and who cannot make their loan payments.
- Able to generate income with the help of the loan in the future, like in the case of education loans, students will generate income after their education, so the lender can grant a moratorium period up to the completion of the study and getting a job OR In case of project loan where income will be generated after completion of the project so that the lender can grant a moratorium period up to the completion of the project.
- Able to meet current expenses with the help of the loan in the future, like in the case of a housing loan, one can mitigate monthly rent expenses after getting a house possession, so the lender can grant a moratorium period up to getting possession in housing loan where the house is in under construction stage.
Loan moratorium periods can vary in duration, depending on the loan tenure and the agreement between the borrower and the lender. Some loan moratorium periods may last just a few months, while others may last a year or more.
Lenders typically offer loan moratorium periods as a form of temporary relief for borrowers who are struggling to make their loan payments. For example, during the COVID-19 pandemic, many lenders offered loan moratorium periods to borrowers experiencing financial difficulty due to job loss, reduced income, or other pandemic-related factors.
During a loan moratorium period, the borrower is not required to make any loan payments, but interest may continue to accrue on the loan balance. This means that the borrower may owe more on loan than before the moratorium period began.
For example, let’s say that a borrower has an Rs.1,00,000 personal loan with an interest rate of 10% per year, and they are granted a six-month moratorium period. During the moratorium period, the borrower does not make any loan payments, but interest continues to accrue on the loan balance. At thRs.1,05,000/- on loan (the original loan amount plus six months of interest).
It’s important to note that loan moratorium periods differ from loan forgiveness or cancellation. The borrower must repay the loan, even if they are not required to make payments during the moratorium period. Once the moratorium period ends, the borrower must resume making their loan payments. They may need to make additional payments to cover the interest accrued during the period.
Loan moratorium periods can temporarily relieve borrowers struggling to make loan payments, but they are not a long-term solution for managing debt. Borrowers granted a loan moratorium period should use the time to address their financial challenges and explore other options for managing their debt, such as debt consolidation, refinancing, or income-driven repayment plans.
Borrowers need to understand the terms and conditions of a loan moratorium period before agreeing to it. They should carefully review the terms of the moratorium period, including how long it will last, whether interest will continue to accrue on the loan balance, and what their obligations will be once the moratorium period ends.
Borrowers should also know that a loan moratorium period may impact their credit score. While a moratorium period will not directly affect a borrower’s credit score, the lender may report the loan as being in forbearance or delinquent. This could result in a temporary decrease in the borrower’s credit score.
Borrowers who are granted a loan moratorium period should use the time to take steps to improve their financial situation. This may include creating a budget, seeking assistance from a credit counseling agency, exploring income-driven repayment plans, or negotiating a loan modification or settlement with the lender.
In addition, borrowers should communicate regularly with their lender or loan servicer throughout the moratorium period. This can help ensure that the borrower is aware of any changes in their loan status or requirements and can help them prepare for when payments will need to resume.
Finally, borrowers should be aware that a loan moratorium period is a temporary solution for managing debt and may not be available for all types of loans or in all situations. Borrowers who are having trouble making their loan payments should explore all available options for managing their debt and seek the advice of a financial professional if necessary. By proactively addressing their financial challenges, borrowers can regain control of their finances and achieve more excellent financial stability.