What is the meaning of moratorium Period?

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Author: Sarthak Bhalerao

Table of Contents

  1. What is a Moratorium Period?
  2. Understanding Moratorium Period
  3. Example of a Moratorium Period
  4. Moratorium Period in the news

What is a Moratorium Period?

A moratorium period is a period during which the borrower is not obligated to make any payments. In other words, during a moratorium period, the borrower is permitted to halt their payments. The interest rate on a loan during the moratorium period generally accrues. It is commonly incorporated in housing loans – called an equated monthly instalments holiday – and educational loans. 

Understanding Moratorium Period

The moratorium period typically commences once a loan is granted. It is primarily extended to give the borrower adequate time to sort finances and prepare for the loan repayment. In some cases, the 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.

Example of Moratorium Period

John was provided with a $500,000 loan by Money Tree Bank, a fictitious bank, in January 2020 to expand his restaurant business. John agreed to pay fixed monthly payments of $100,000 over six months (total repayment of $600,000) to secure the loan, with the first payment due at the start of February 2020 and subsequent payments at the start of each following month.

However, in mid-March 2020, John’s restaurant business was forced to close due to the coronavirus pandemic. Due to such an unprecedented event, Money Tree Bank decided to grant John a moratorium period from mid-March 2020 to June 2020 for no additional charge. As a result, John is now able to defer his April 2020 payment to July 2020.

Moratorium Period in the News

Examples of moratorium periods in the news are provided below:

  • Due to the coronavirus pandemic, the National Student Loan Service Centre in Canada announced that it would allow students to pause their student loan payments from March 30 2020 to September 30, 2020. The pause on student loan payments is part of a rescue package for the Canadian economy.
  • Also, following the coronavirus pandemic, the Reserve Bank of India offered relief to loans (such as home loans, personal loans, education loans, etc.) in the form of a moratorium period from March 1, 2020, to August 31, 2020. Although borrowers are not required to make payments during the moratorium period, the Reserve Bank of India indicated that interest is not waived off and will continue to accrue.