Q. I am taking an education loan to study abroad. A few of my friends told me about the moratorium period but I do not know how it works. Please help me understand it and why it is significant? – Shiv Sagar
A. A moratorium period is referred to the grace period where you are not required to repay the loan to the lender. It is usually your course work period and 1 year or 6 months after you start working, whichever is earlier. This period is usually extended to education loan borrowers. So, students or parents availing an education loan are not compelled to repay anything during the moratorium period. They can begin the repayment process after the moratorium period ends.
However, the lender will charge a simple interest on the loan amount during the moratorium period which will get added to the EMIs once the repayment process begins.
As such, it makes a lot of financial sense if you could start repaying your education loan EMIs even during the moratorium period in order to ease your overall financial burden. You can utilise any money you make with part time jobs or financial gifts from family during your course to start repaying your EMIs. Even smaller contributions will make a dent to your overall debt. Do note that the preferential interest rates will stop and make way for higher rates once the moratorium period gets over.
It’s crucial that you make an effort to understand how exactly your education loan works, how long is the moratorium period, how much simple interest will be charged during this period, what will be the actual interest rates after the moratorium period, how much will your EMIs cost and what are the late charges if you fail to meet a repayment deadline to help make a clear repayment plan. Do note that terms and conditions, alongside charges may differ from lender to lender. A clear plan is necessary to ensure disciplined repayments when you start working and to steer clear of debt accumulation and an impacted credit score.
Have a question on personal finance? Ping me on Twitter at @adhilshetty with the hashtag #AskAdhil. The writer is CEO, BankBazaar.com, an online marketplace for loans and credit cards.