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The Government of India (GOI) has announced the scheme for the waiver of compound interest, that was payable by the borrower who had opted for loan moratorium between 1st March 2020 and 31st August 2020. The scheme is to grant relief of ex-gratia payment of difference between compound interest and simple interest for six months to borrowers in specified loan accounts (1st March 2020 to 31st August 2020). As per the guidelines, retail loans such as home, education, auto, personal and credit card debt of up to ₹2 crore are eligible for this relief.
To be eligible the loan account should be a standard account and not a non-performing asset (NPA), as on 29th February 2020, in simple words, up until 29th February 2020, you should not have defaulted on any of your monthly installments. The lending institution should either be a banking company, public sector bank, co-operative bank or regional rural bank, an all India financial institution, a non-banking financial company or a housing finance company.
Even if you have not opted for the moratorium, you can now opt for this relief scheme. You should get advantage of the scheme even if you have taken a part moratorium or not availed the loan moratorium. The scheme is not limited to full moratorium borrowers.The amount saved through compound interest waiver will turn out to be much smaller. This is because only the interest that would have been charged on the interest of your original loan during the six months moratorium period is waived off, as per the guidelines.
In other words, your loan repayment will continue as per term and you will still need to pay back not just the principal amount but also the simple interest you would have paid if you had not opted for the loan moratorium. Only, that compounding interest goes off. If the moratorium ended sometime ago and and if you had started EMIs again. You will get the extra money paid on interest on interest. The lender needs to deposit the interest in their bank accounts by 5th November 2020. However, the best option is to adjust the outstanding loan amount. This will reduce the principal amount and technically that’s the best approach to adapt.
It is advisable to try and get rid of your investments, that haven’t worked out, low-yielding traditional endowment insurance policies, or other assets like gold, to slash the amount owed. Start by paying off your credit card dues or personal loans as these are high-cost loans and can lead you straight into a debt trap. Instead of taking it easy after this announcement of compound interest waiver, utilise all your resources to help you get out of the debt trap sooner and revert to your pre-moratorium position.