In difficult times, many times such a situation arises when individuals need some special help to overcome the financial crisis. Loan Moratorium is one such facility, which provides relief to those who are unable to repay their installments due to financial pressure. In this article, we will understand what is Loan Moratorium, how it works, and what are its benefits.
What is a Loan Moratorium?
You must have heard the term “Loan Moratorium” at some point or the other, especially when there is a major economic recession or natural disaster in the country. But what does it mean? Let’s understand it in simple words.
Suppose you have bought a car and taken a loan for it. Every month you have to pay a certain amount (EMI) on this loan. Now, if a major disaster suddenly comes into the country and you lose your job, it will be difficult for you to pay EMI every month. In such a situation, the government or the bank can give you relief from paying EMI for some time. This relief is called “loan moratorium”.
A loan moratorium does not mean that your loan is waived off. It only means that you have got relief from paying EMI for some time. During this time also interest will continue to be charged on your loan, and after the moratorium period is over, you will have to pay this interest and the remaining EMI.
Why is a Loan Moratorium Given?
- Economic recession: When there is an economic recession in the country, many people lose their jobs and they are unable to repay the loan installments. In such a situation, the government or the bank declares a loan moratorium so that people can get time to recover from financial difficulties.
- Natural disaster: Natural disasters like earthquakes, floods, and droughts destroy people’s homes and property. In such a situation, they become unable to repay the loan installments. In such a situation, the government or the bank declares a loan moratorium.
- Personal financial crisis: Sometimes a person gets a serious illness or someone in the family dies, due to which he is unable to repay the loan installments. In such a situation also, banks can consider giving a loan moratorium.
Key benefits of Loan Moratorium
- Avoiding repayment pressure: With the loan moratorium facility, borrowers can avoid the pressure of installments and manage their financial crisis.
- Support in emergency: It becomes a great relief in times of natural disaster, pandemics, economic recession, or personal crisis.
- Help in financial stability: This facility gives borrowers a chance to stabilize their financial position so that they can repay installments in a better way in the future.
- Avoiding default: The biggest benefit of the moratorium is that it protects borrowers from becoming defaulters, thereby protecting their credit score.
- Reduction in mental stress: The burden of installments can increase mental stress during economic crises. A loan moratorium reduces this stress.
- Timely financial planning: This facility gives borrowers time to plan their finances and organize their expenses.
- Support for small businesses: This facility can be extremely helpful for small and medium businesses, as it helps them maintain their business.
- Investment opportunities: The amount saved during the moratorium can be used for other needs or investments.
- Improving the relationship between the bank and the borrower: This facility helps maintain a positive relationship between the bank and the borrower.
- Stability of the financial system: In times of economic crisis, this facility helps in keeping the entire financial system stable.
When and how to take a loan moratorium?
To get a loan moratorium, you have to contact your bank or financial institution. Usually, this facility is given to those who are unable to repay their installments due to any crisis.
To get a loan moratorium, borrowers have to follow the following procedures:
- Application process: Contact the concerned bank or financial institution and apply for a moratorium.
- Required documents: Submit the required documents to prove your financial crisis.
- Acceptance of terms: Carefully understand and accept the terms and period prescribed by the bank.
What to do after the moratorium?
After the moratorium ends, you are required to repay your loan dues and the associated interest in a systematic manner. Therefore, it is important that you use this period to improve your financial situation.
(1) Reevaluate financial commitments: Borrowers should do a holistic analysis of their expenditure and financial priorities during and after the moratorium. This analysis will help them eliminate unnecessary expenses and distribute their resources better.
(2) Formulate long-term financial strategies: Borrowers can use this period as an opportunity to restructure their financial long-term plans. This includes developing savings habits, creating alternative income sources, and building an emergency fund for future financial emergencies.
(3) Timeliness in loan repayment: It is extremely important to ensure that all pending installments are repaid within the stipulated time frame after the moratorium ends. This will not only help in maintaining financial discipline, but will also improve the credit score.
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Disadvantages of Loan Moratorium:-
- The burden on banks: This causes losses to banks as they do not get interest payments.
- Inflation may increase: If many people take advantage of this, the amount of money in the market may increase, which may increase inflation.
- It may make people careless: If people think that they will get it, they may become careless in taking loans.
This is a facility that gives relief to people in times of economic crisis. But it should not be used indiscriminately. The government and banks should ensure that the benefit of loan moratorium is given only to those who really need it.