Home Loan

Moratorium Period
While going to apply for a loan, people must have heard about Moratorium Period. This term is very common for the people who are applying for education and home loans. However, this is really not possible for everyone to understand the meaning of this term and they get confused with it. The moratorium period is very simple and easy concept.

The term Moratorium Period stands for the time period during the loan cycle when the borrower need not to pay or repay the principle amount but have to pay the interest amount only. Generally, this period starts from the day when the loan was disbursed in the account of the borrower and during this time, he gets principle holiday and till the EMI starts, he just needs to pay the interest. There are basically two types of holidays that borrowers enjoy during this time:

1. Principle Holiday where the borrower is not required to pay the principal amount back during the Moratorium Period.

2. Interest Holiday is where the borrower has to choose if he is willing to pay the interest to the bank or financial institution during that period or not. This offers a leverage to the customer, but it all depends upon the banks as they have different products and based on the products if they require to pay interest or not. There might be cases where borrowers are not required to pay interest during the Moratorium Period and thus is termed as interest holiday.

Why Loan Is Taken?
Generally people take loan to pay their dues or to purchase anything that doesn’t fit their budget. Loan is said to be an amount that banks or financial institution grants after checking the credit score of the borrower and offers him to pay in easy installments. Interests are charged over the principal amount for the time period loan is taken. It is a legal credit, which is recommended for those who are in need of immediate money. Loan has become a very common term these days and certain middle class people, businessman take loan for their expenses to be covered.

Benefits Under Moratorium Period
Yes, there are lots of benefits that one can enjoy under the moratorium period and the major one is that you don’t need to pay the principal amount. This is really easy for a person to pay only interest as many banks also offer concession in interest rates, which lowers the amount that you need to pay. All this is possible if you are paying within this period. However, on the other end, if you are not paying the interest amount regularly then it will be capitalized. In this context, if a borrower fails to pay his amount of interest regularly, quarterly, or may be annually, then at the end of the year, the interest will be capitalized and will be added to the principal amount which will make EMI more payable to the banks.

Why Moratorium Period Is Granted
People after knowing about the advantages of the moratorium period should know about why it is offered. This period is offered for a time being to a person or an asset where the income producing ability is low or nil. The best example you can understand is education loan. Here, the student is not going to earn money after taking a loan and he has to complete his education. Thus, for him, moratorium period is granted so that he needs not to worry.

Under education loan, it depends upon the course that the student is taking and what is the duration of it. If a student is going for Masters which is for 2 years, he can start repaying the amount once he gets the job. Maximum leverage time that banks offer is 8 months additionally to cover his unemployment expenses.

Next example could be a person who has to construct his house. There are other expenses which are to be paid so in that context, the principal amount is levied and some time is granted so that the house owner can repay the amount easily. There are certain conditions depending upon the type of property one is taking, if you are ready to move into property is there, then a maximum of 18 months is granted to repay the amount. In case of under construction, property, maximum time is 3 years and in case of construction, property, maximum time is 18 months. It all depends upon the CIBIL score of the borrower and credibility of the banks.

If banks are offering you an interest holiday during moratorium period, then the interest is compounded which will affect your EMI.

Under both the scenarios, taking tax benefit is possible. Talking about educational loan, an individual can claim tax benefit on the interest paid once he starts earning and start paying interest. In case of home loan, there is a tax to be paid during the construction of houses on the interest to be paid.