The government has announced it will take upon itself the burden of ‘interest on interest’ incurred by borrowers during the moratorium period. Loans of up to Rs 2 crore will be eligible.
Suppose you had a loan of Rs 1 lakh at the start of the moratorium period. The interest rate is 10 per cent and repayment period is 5 years. Your EMI is Rs 2,027, of which Rs 1,361 is the principal component and Rs 667 the interest.
“When you avail of a moratorium, you don’t repay the principal component of the EMI, so the loan outstanding remains the same. And you also don’t pay the interest component, so that gets added to the outstanding,” says Aditya Mishra, founder and CEO of SwitchMe, a digital home loan broker.
In this example, the outstanding at the end of the first month of the moratorium will be Rs 1,00,667. In the second month, the EMI will be calculated not on Rs 1 lakh but on Rs 1,00,667. Again, the principal will not be repaid. The interest component in the second month will be higher than Rs 667. This process will repeat for the rest of the period.
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