Introduction

Holiday period or moratorium is the tenure, which commences from the disbursal of the loan to the time the borrower makes his/her first Equated Monthly Installment (EMI). This is the period in which the repayment doesn't start. Depending on the type of the loan, the duration of this period may vary. For instance, in education loans, the period is the duration of the course plus 1 year or 6 months after getting a job, whichever is earlier.

This cushion period is provided for the borrowers to arrange for funds before actual repayment in the form of Equated Monthly Installment (EMI) begins. In case of education loans, it is 12 months or 6 months after getting a job, whichever is earlier. While in case of home loans it is up to 18 months, allowing completion of the construction of the home/residence.

Loan servicing in moratorium period

However, the borrower has the discretion of servicing his/her loan during the moratorium period too if he/she wishes to. The benefit of doing so is that the banks offer a concession on interest rates if the borrower starts paying back interest in the holiday period.

However, the terms and conditions on servicing of loans in the moratorium period vary from bank to bank. For instance Punjab National Bank offers 0.5% concession on interest serviced during the holiday period, whereas Allahabad Bank, Corporation Bank, and Union Bank of India offer 1% concession on interest if the borrower services his/her loan during the moratorium period.

The interest rate charged during the moratorium/ loan repayment holiday is generally charged quarterly or half yearly on simple interest basis. If the interest is serviced during this period, the accumulated sum must be added to the principal and the EMI is thus accordingly adjusted by the bank.