A moratorium period is a period during which the borrower is not obligated to make payments. In other words, during a moratorium period, the borrower is permitted to halt their payments. It is commonly incorporated in home loans – called an equated monthly installments holiday – and educational loans.
Understanding a Moratorium Period
A moratorium period typically commences once a loan is granted. It is primarily extended to give the borrower adequate time to sort out finances and prepare for loan repayment. A moratorium period can also occur during the mid-life of a loan. It would be the case if the lender allows the borrower to stop making payments over a specified period for a specific reason – for example, due to financial hardship. It should be noted that interest on the loan generally accrues over the moratorium period.
Is a Moratorium Period Beneficial?
The ability to defer payments into the future offers greater financial flexibility. However, it is important to recall that interest generally accrues over the moratorium period, resulting in a higher total loan amount payable.
Unless the borrower is under financial distress – i.e., unable to make payments – the financial flexibility of a moratorium period is largely offset by the additional interest charge.
Moratorium Period vs. Grace Period
A moratorium period is commonly confused with a grace period. It is important to note that a grace period is a set length of time after payment is due, where a payment can be made without penalty. In other words, a borrower is expected to make a payment over the grace period or face penalization – such as a late fee, credit rating downgrade, etc.
On the other hand, over a moratorium period, a borrower is not required to make a payment over the period. In addition to the distinct difference as outlined above, a moratorium period length can range from weeks to months, whereas a grace period length is usually 15 days.
FAQs
How Long Is a Loan Moratorium Period?
The length of a loan moratorium period will vary depending on the individual and is agreed upon between the lender and borrower. A moratorium can be up to a few months to a year. They are generally longer in term.
What Is an Example of a Moratorium?
An example of a moratorium would be an individual who takes out a loan and has a monthly payment of $300. If the individual can no longer pay this $300 due to financial hardship, they would contact their bank and ask for a moratorium on the loan payments. The bank would agree to a moratorium for six months, in which the individual does not have to make any payments.
What Is the Grace Period of a Loan?
The grace period of a loan will differ for every loan or credit card. Typically, a grace period will be 15 days, but it can be more or less depending on the lender.
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