Higher interest if you defer EMI payment!

New Delhi: Be ready to pay higher interest on your outstanding loan if you decide not to pay EMIs on your home or auto loan for the next three months under a moratorium announced by the Reserve Bank of India.

Analysts and experts tracking the sector said that simple interest rate would be calculated by banks for the three-month period in which loan repayment was due but was not paid under the moratorium. This would be added up into your EMIs at the end of three-month forbearance, raising your monthly bill.

So, if you're deferring payment of an EMI of, say Rs 1,000, and the bank is charging interest at the rate 10 per cent on outstanding, you will end up paying Rs 25 extra on each of the three EMIs that has not been paid during the moratorium.

This additional interest may either be added up to all your future EMIs or your loan tenure could get extended at the same EMI level.

"Whether the customers will have to pay this additional interest in one go or will be allowed to get it adjusted as additional EMI is something that needs to be clarified by banks," said a financial sector analyst asking not to be named.

As a result of the moratorium, the tenure of such loans will get extended by three months which should be possible as floating rate loan contracts typically have a provision for extension of loan tenure.

If additional interest burden for three-month moratorium period is also equally divided in all future EMIs, the monthly bill for customer may increase or banks may decide to keep EMIs same but increase the tenure of loan by a few months.

"The 3-month EMI moratorium is a welcome move for those customers whose short-term cash flows are adversely affected by the coronavirus pandemic.

This basically means that the customers may be allowed to defer their immediate EMI payments, but come June, they will have to resume the payments. It is not a waiver, but only a shift in payment schedules," Kunal Varma, CBO and Co-Founder, MoneyTap said.

Customers who have the ability to pay (such as salaried professionals whose incomes are still intact) should compare their original cash flows with the revised repayment schedules and accrued interest payments, and then take a call on what makes the most sense for them, he added.