Should I opt for Moratorium for my EMI, explained with scenarios?

Articles > Submitted by raja on 4/7/2020 | Views: 166

In this article, I will try to explain different cases based on which whether we should opt for Moratorium or not. All the use cases are imaginary in nature however I have tried to be as close to the real world as I can.

Table of Contents

    As the Covid-19 hits around the world badly, complete lockdown is the only way to contain it as no medicine has been approved so far specific to this. This lockdown has causes severe impact on almost all industries.

    To the relief of those who had taken loan and their EMIs are going through, RBI has announced an option to delay the payment by 3 months (note that your EMI is not waived and these three months interests will still be charged, its just that you have been given relaxation to not pay the EMI for three months). This is called Moratorium. 

    Moratorium means "a legal authorization to debtors to postpone payment." So during this period, even if you do not pay the EMI, your CIBIL or credit score will not get affected. In order to avail this facilities, you can contact your bank branch as different bank has different ways or working and for few banks, its by default and for others, customer has to opt it.

    Let's take different scenarios and try to come to conclusion whether Moratorium should be opted or not?

    You have 10 months of EMIs and household expenses

    If you have 10 months of EMIs and household expenses (including School fees) either in Bank fixed deposits or Liquid mutual funds, you have enough to survive in case something goes terribly wrong. You can continue paying EMI during this period.

    You have 5 months of EMIs and household expenses

    Whatever money is coming in for next few months, accumulate it and ensure your 10 months of EMIs and household expenses, you can opt for Moratorium if you think your job is not stable. If your job is stable and/or have side income, continue paying EMIs.

    You have 2-3 months or less of EMIs and household expenses

    You are at border line, so cover yourself. Its official, based on world news that recession has started and any recession lasts at least 12 to 18 months. Opt for Moratorium and accumulate money to cover 10 months of EMIs and household expenses. Ensure that you are surviving during recession period without getting defaulted.

    You are getting enough rental income or side income to pay EMIs and you are financially strong

    Do not opt for Moratorium, as delaying your EMIs for 3 moths may cause 6-7 extra EMIs depending on your loan amount and duration of loan. Do not treat Moratorium as a luxary of not paying EMIs, it comes with cost.

    You have recently bought a new house and want to prepay the loan by selling existing flat

    If you have enough money to survive with all expenses for next 10 months, continue paying EMIs. As there are less chances you will get your desired price of your existing flat and opting for Moratorium will unnecessary increase interest burden. Try to sell your flat as soon as you can. 

    If you do not have enough money for next 10 months expenses, opt for Moratorium and accumulate money to cover next 10 months expenses. Anyways you are planning to close the loan as soon as your flat is sold so slight burden of extra interest for Moratorium period is worth taking. Those money will give you enough confidence and liquidty to survice if something goes teriibly wrong in future.

    You have rental coming from loaned house but that doesn't cover entire EMI amount

    If you financially sound and have 10 months of expenses with you, add your own amount with rent amount and continue the EMIs.

    if not, opt for Moratorium as there are chances that during next few months your tenant may also vacate and getting tenant with high value property will be difficult so these amount accumulated during Moratorium period will give you enough money to pay for next couple of months without getting defaulted. Its basically suriving for next couple of months with basic necessitiies.

    Should I pay Moratorium period EMIs once at a time when I have enough cash?

    Yes, of course. Loan are always good to prepay. Whenever you have enough cash apart from coverting next 10 months of expenses, try to pre-pay as much as you can.

    Should I pay EMIs using personal loan?

    Never think to do this. Personal loan interest rate is higher than housing loan.

    I have personal loan or non-housing loan, what should I do?

    These loan interest rates are higher than housing loan so same rule applies as above. If you can pay the EMI, do pay otherwise opt for Moratorium and try to pay as soon as you can once thing stablizes. Cut your luxurious expenses and focus on paying these loans first.

    Where should I keep my emergency money (next 10 months expenses amount)?

    FD interest rate is low and chances are it will go further down so keeping emergency amount in FD is not a good idea.

    You can chose to invest 40% in FD and remaining in Liquid mutual fund or over night funds as these are emergency funds and you may need in few days so do not invest in equity long term, mid or short term funds. Short term funds are also not for these kinds of funds. Do not compromise on this amount just to get few % extra interest rate. Always go with trustworthy mutual fund houses like HDFC, SBI, Nippon India (earlier Reliance) etc.

    Share Market have crashed, should I invest my emergency funds in market?

    Though many companies shares are available at mouth watering price but do not compromise with your emergency fund. Market is very unpredictable and one should always invest those money in market that they do not need for at least next 3+ years (ideally 5+ years).

    Even if you have full confidence on the market, still its not good to compromise on emergency fund as it will give your sleepless night, panic and leading to wrong decisions.

     

    Hope this helps, Thanks for reading. Do share your feedback or comments if you agree or even do not agree on some of the points.

    Website disclaimer: The views, opinions, investment advices (if any) expressed by author on Sharefunda.com are their own and not that of the website or its management. Users are advised to contact certified financial advisor before making investment decisions.

    Submitted by raja on Tuesday, April 7, 2020

    Wait for opportunity and grab with all hands like Eagle.

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