The point to keep in mind, said a public sector banking official, is that the government’s proposal waives interest on interest during the moratorium, but borrowers still have to pay simple interest during the moratorium period.
To explain how interest in interest exemption It works, let’s take the case of a 2 million rupee home loan taken in March 2015 with a term of 20 years. In March 2020, when the moratorium came into effect, the outstanding amount would have been just over Rs 1.75 million. Simple interest of 8% for six months would translate to 7 lakh rupees. This is only the interest charge, which must be borne by the borrower. If this amount is not paid once in September and is stuck with the principal, the repayment period will be extended by 20 months, 17 days with the exemption.
Without the exemption, the borrower would also have to pay interest on the 8% interest on this Rs 7 lakh for six months. This amount, based on compound interest, adds up to Rs 11,774 and will effectively become your profit as it has been forfeited. However, it does not mean cash on hand, but a shorter loan term.
However, in the case of credit cards, an outstanding amount of Rs 1 lakh would mean that a borrower would have to pay Rs 19,336. With the exemption, the interest expense is Rs 17,940, so the benefit will be Rs 1,396 over the six-month period.
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