Everything You Need to Know About Moratorium Period

Posted In education loan On October 24, 2018
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Let’s begin with the thought that your loan amount is not just the money you are getting from the bank but more importantly the money you have to return along with the interest.

Keeping in mind that the loan has to be repaid by students, banks give a grace period when the borrower does not have to repay the lender. This is known as the moratorium period. This period is decided by the lender, but usually, it is one year from the completion of your course or 6 months from you starting a job - whichever comes first.

Since students do not have an income during the course, education loan provides this feature to let students repay the loan after they start earning and build their finances.

It might sound like a blessing but like everything, it has pros and cons as well.

Pro is very obvious that it provides a financial cushion to the students as there might be a time gap between completing his course and getting a job.

Now, let’s talk about the time you actually have to repay the loan. The earlier you repay the loan, the lower will be the total interest paid on your loan. So, if the borrower can manage his EMI from the very beginning, he should not opt for moratorium even if the offers sound tempting.

Even though students are not required to pay EMIs till moratorium period is on, the interest still accrues and adds to the burden. Banks start charging the interest on education loans immediately and not wait until the waiver period ends.

Additionally, the EMI amount will be higher after the moratorium period is over. This is despite low savings in the initial few years of interest payment. For example, suppose a borrower has taken Rs 10 lakhs for 5 years with a moratorium period of one year. In this year, the borrower is supposed to pay the interest only. After the moratorium, the borrower has to repay the EMI in the remaining four years. Naturally, the EMI will be much higher since the repayment tenure got smaller.

Since every borrower has different needs and expectations about the repayment to the loan, banks have provided borrowers with different option to repay the loan. These options are as follows: -

  • SIMPLE INTEREST: Here, the borrower continues paying the Simple Interest during his study period. Hence, Simple Interest doesn’t keep on adding to the Principal amount and thus, the EMI is only the Principal amount plus Compound Interest.

  • PARTIAL SIMPLE INTEREST: In this mode, the borrower pays only a portion of the simple interest and the remaining interest keeps on adding to the principal amount. Hence, the compound interest is ultimately charged on the principal amount as well as the remaining simple interest.

  • EMI: In this case, the borrower doesn’t pay any amount till the end of the moratorium period. Hence, the payments are made EMIs and the Compound Interest is charged on the Principal amount plus Simple Interest.

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