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To Pay or Not to Pay! Should you postpone your EMIs of home loan, car loan etc as allowed by banks?

Due to the expected economic turbulence in these times of COVID-19 (or Corona), the Indian Government recently announced - that people having to pay EMIs or Interest on Cash Credit (CC) facilities - can chose to defer such scheduled payments for three months. Meaning, the installments or interest due between 1st March 2020 to 31st May 2020 can be paid by 30th June 2020 without it affecting the credit score or penal interest being charged to the borrower.

It is natural that "pay later" sounds lucrative. But, it is important to note that the above option only provides relaxation in payment requirement. It does not pause the interest that will accumulate on the outstanding loan balance of the borrower. Let us take an example. Suppose a person has car loan outstanding of Rs.6,00,000 and 52 EMIs are remaining. Now if the EMIs are paused for three months, interest will keep on adding up to this Rs.6,00,000 loan balance. The extra interest payable due to such pause will be equal to around 1 EMI. Or lets take example of a housing loan. For a housing loan of 30 lacs with remaining maturity of 15 years the net additional interest will be equal to approx 2.34 lacs equal to 8 EMIs.

So if a person has funds available or is going to receive sufficient income during above three months, then clearly it is better to pay the EMIs as per original schedule. Keeping funds idle at 4% (in saving bank account) is clearly not a wise decision when such funds can be paid into bank's loan account and save the 8-9% interest being charged.

If one looks at it, the bank is offering a temporary loan at 8-9% of the amount equal to the principle you are postponing to pay. The decision to pause the EMIs should definitely be the last option for any borrower and not the first one.

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