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Should you make EMI and Credit Card Payments

In order to the ease, the liquidity problem in the country that borrowers might face due to nationwide lockdown RBI has given the option to banks and financial institutions to offer 3 months’ moratorium on term loans and credit cards bills deferment. It was felt that there will be a temporary disruption in cash flow due to reduced pay cuts of salaried class and loss of income to businesses. It is applicable to all the segment of term loans (home loans, education loan, car loan, etc) and irrespective of the tenor of the loan.

Though the relief was provided by RBI it is still unknown that the moratorium is not mandatory. It gave the option to banks to take a call on whether they are in a position to extend measures to their respective customers after looking into their financial strength and position after rising NPA and frauds which had stressed the banking system. State run banks are going automatic route where repayment is deferred unless clients inform to opt-out. Whereas private banks have gone for opt-in option where customers have to inform the bank to take this benefit if they wish to take the relief.

What customers should do?

Well, this COVID-19 moratorium looks fascinating but this comes with a cost which can add burden to customer’s interest. Since this is an only a grace period and not waiver and banks will charge interest for the unpaid amount. A lot will depend upon the age when the loan was taken. If a customer has taken loan recently and if he has no constraint to repay then he should not take this moratorium relief as new loans have a larger proportion of interest into EMI’s accounting for 80-85 % in first few years, which eventually gets reduced as the loan gets paid off. So when a new loan goes to an extended grace period a higher amount will get added as interest. The recovery of interest will depend upon bank to bank. Some bank may hike the EMI, some bank can extend the loan tenor, some bank can expect a one-time recovery in June. Credit cards charge 2-4% for rolling over the balance. If customer defers payment for two months, the cumulative interest can be added up to 4-8%. So unless there is cash crunch this relief should be avoided.

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