Missing two instalments may add 10 months to loan

NEW DELHI: Hit by the lockdown and faced with uncertainty, many people are looking to avail of the repayment relief that banks are offering. Although banks are yet to announce the details of the relief package and how it will work out, we do know that this is only a grace period and they are likely to charge interest for the unpaid amount.

Missing two instalments could extend your loan by 6-10 months, or increase the EMI amount by 1.5%. The borrower may be given three options by the lender:

Option I: One-time payment in June of the interest that accrues in April and May
Option II: Add the interest to the outstanding loan and increase EMI for remaining months
Option III: Keep the EMI unchanged but extend the loan tenure.

The number of additional EMIs will depend on the age of the loan Let us assume a borrower took a home loan of Rs 50 lakh at 9% for 20 years. The EMI comes to Rs 44,986. If he wants to skip the next two EMIs (April and May), the table given here (see graphic) shows how the moratorium will impact his repayment schedule.

Clearly, the longer the remaining tenure, the bigger is the impact. This is because the interest accounts for a larger portion of the EMI in the early years and progressively comes down. Even after the first year, the interest accounts for almost 80% of the EMI. But in the 19th year, the interest portion is less than 10% in the EMI.
So, people with older loans taken 10-15 years ago will not feel the burden as much as someone with a new loan taken 2-3 years ago. Ironically, people with older loans may not really need the moratorium as much as those with younger loans.

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Times of India
01/04/2020