Moratorium Extended for Another 3 Months: Should you opt for it?

The Reserve Bank of India (RBI) has announced an extension of the moratorium on loan EMIs including credit cards till August 31, 2020. While it was announced for 3 months initially till May 31 2020, the moratorium now has been extended for another 3 months till August 31, 2020. This means that those who have opted for moratorium need not pay EMI on the loans or credit card dues in this period.

But how opting for the same can impact your future lending? And should you or should you not opt for this? Here we will discuss the impact of the moratorium extension, how much more you will be paying at the end and whether you should go for it or not?

How the Moratorium will Impact you if you opt for it?

The motive behind this extension announced by RBI is to provide temporary relief to the people facing financial hardship caused by COVID-19 pandemic. However, opting for the same can impact you in the following ways-

• The interest will continue to accrue on the unpaid dues during the moratorium period of 6 months (refer to the below-mentioned illustration on interest calculation)
• You can defer payment by paying the ‘minimum due amount’ and roll over the balance amount to the next month. But when you do this, the unpaid amount is carried forward to the next billing cycle and about 2-4% interest is levied on the outstanding amount
• If you make any further purchases during these 6 months, the interest in the new expenditure will also start accruing and may add to additional costs

 Repayment Schedule

 If you opt for the moratorium extension, you need not pay your credit card dues for 6 months starting from 1st March 2020 to 31st August 2020. However, a moratorium is just a deferment of payment and not the waiver. It is only a grace period, so you will have to pay the accrued interest when the moratorium period gets over.

Read more: How much would a credit card cost?

Pros and Cons of Opting for Moratorium

Following are some of the advantages and disadvantages of opting for a moratorium and further extending the same for another 3 months-

Actual Bill Payment With or Without Moratorium

Without Moratorium- When you don’t opt for a moratorium and pay your credit card dues on time, interest charges will not be levied in such cases. Generally, an interest-free period of 20-50 days is provided to you from the bank’s side. Paying your bills timely won’t cost you any hefty charge.

With Moratorium- If you opt for the same, even if there will be no transaction till August 31, the interest will continue to accrue on the outstanding balance. The total payable amount after the moratorium period gets over (i.e. after 6 months) will be extremely high.

Example of How Moratorium will Impact your Finances

 Let’s have a look at a basic illustration depicting how opting for moratorium can cost you heavily.

Interest Calculation when you opt for the 6-month Moratorium-

1. Total Transaction as on 5th March 2020- Rs.20,000
2. New Amount Due Date- 30th September 2020
3. Next Statement Dates- 10th April, 10th May, 10th June, 10th July, 10th August, 10th September
4. Transactions done between 10th March to 10th September- NIL

Should you Opt for the Moratorium?

 While opting for a moratorium will neither impact your credit score nor incur any late payment or penal charges, the interest on the outstanding amount will continue to accrue during these 6 months. The high interest levied will get added to your outstanding amount and will eventually increase your payment burden when the moratorium period gets over.

We would recommend that you should not apply for a credit card moratorium if possible because the deferment would eventually cost you much higher. Undoubtedly you will get another 3 months to pay off the dues but the interest burden will be relatively high when compared to other types of loans. An average extra interest burden that you would bear can go up to 49-50%.

Hence, opt for a moratorium, only if you are facing major financial hardship during the lockdown, otherwise, it is advisable to continue paying your credit card dues in full and on time.