Why you should not defer credit card, personal loan payments despite moratorium: While the Reserve Bank of India (RBI) has allowed all banks to offer three-month moratorium to borrowers, including credit card customers, you should be careful while availing the grace period on loan repayment as you will be charged compounded interest (interest on interest) when you start repaying your loan outstanding once the moratorium is over.
While lenders are yet to finalize the nuances of how they’ll extend the moratorium benefit to their customers, industry experts are advising customers to pay off those loans where interest rates are rather high.
“The moratorium applies for overall card outstanding inclusive of interest. If one chooses to opt-in for the moratorium, such outstanding interest will accrue further interest, leading to compounding,” RBL Bank said, responding to Economic Times’s mailed questionnaire on the topic. “Customers are advised to make the maximum possible payments on time rather than deferring payments, leading to interest charges being levied.”
Although borrowers of home or auto loan may afford to opt for the moratorium, as these loans fetch lower rates, experts say one should not opt for the moratorium on personal loans or credit card dues. In the case of credit cards, the outstanding balance as on March 1, 2020, may attract as much as 40% compound interest, leaving customers under huge repayment burden when the grace period ends.
For example, if you have credit card dues worth Rs 50,000 as on March 1 and you opt for the moratorium, then after May 31, 2020, when the moratorium ends, then you have to pay around Rs 58,000.
The RBI on Friday announced a slew of measures, including a 75bps repo rate cut and the grace period on all term loan repayments for a period of three months between March 1 and May 31. These measures are taken to ease the economic impact on millions of borrowers whose cash flows have been impacted due to financial disruption caused by the pandemic. In the absence of clarity from the central bank, the call on how and when the interest rates would accrue for customers opting for the moratorium could depend on individual lenders.
