The Reserve Bank of India (RBI) allowed banks and other financial lenders to give a 3-month moratorium facility to their customers amid the economic uncertainty from the COVID-19 pandemic.
This is an optional facility that comes as a much-needed relief for those who may be facing a cash crunch due to non-payment from clients or a cut in salary income or loss of employment. The movement restrictions have been especially hard on those who are self-employed or work for small businesses.
However, if your sector of employment/business is not facing such constraints and your cash flow remains regular, you could use this as an opportunity to save more or reduce your debt burden.
1. Work-from-home means reduced expenses
You may be working from home for close to a month now. All your expenses associated with travelling to work, vacations, eating out, shopping and large purchases have been put off due to the lockdown, that is going to most likely be extended.
If you have been receiving a regular income, you could spend some time to direct the unexpected increase in savings to make good investments for the future or pay off any small debts you may have or simply move the money into a savings fund. You could even opt something small like making advance payments to your satellite TV provider or online streaming service by purchasing an annual subscription for a discount.
2. Do not opt for EMI moratorium if you can afford it
You must already be aware that for those who opt for the moratorium, it is a deferment and not a waiver of EMI or credit repayments. It means that the total tenure of the loan will increase by 3 months and so will your interest payable.
Since it will only increase your overall debt burden, it is wise to continue paying installments towards loans and credit card bills, if your income has not been severely affected.
3. Move to repo-linked interest rates
If you have a large loan (like a home loan) linked to MCLR, it is a good time to write to your bank to opt for repo-linked lending rate-based pricing.
The transition of RBI's repo rate cuts are faster (almost immediate) in the case of RLLR-based loans.
In the current scenario, it is likely that the repo rate will lay low until the economy shows signs of recovery from the COVID-19 related damage. MCLR rates by banks, on the other hand, take a year to reflect repo rate cuts on your home loan interest rate.
4. Increase EMI outgo to save on overall interest payment on large loans
Along with moratorium facility, RBI also announced a 0.75 percent cut in its repo rate on 27 March. Assuming your home loan is linked to the central bank's repo rate as the external benchmark, there will be a 0.75 percent in your interest rate payable as well.
If you have enough cash flow and can stick to your current EMI outgo, you will not only make a saving on your overall interest payment but will also reduce the loan tenure significantly.
For example, for a 30-year loan at an interest rate of 10 percent, the monthly EMI outgo will be Rs 28,951. After the 0.75 percent reduction in interest rate to 9.25 percent, the monthly EMI outgo will fall to Rs 27,476 and if you were to keep paying the Rs 28,951 installment, you could pay off your loan sooner than 30 years and also reduce the overall interest outgo by Rs 3.5 lakh.
Note that the above example involves a rough calculation for purposes of explanation only.
Whether interest rates fall or gain in the future, you can use the present decline make overall savings on your loan repayment. If affordable, you can even increase your EMI outgo to pay off the loan faster.
5. Increase emergency fund balance
Panic buying and shortage of supply in retail outlets have caused a sudden increase in demand for staples. People are buying anything that is available at any cost, and if you may have noticed, this has caused an increase in the prices of diet essentials like rice and pulses in the last few weeks.
Retailers are expecting supply shortage to last longer, which could transcend into an increase in your household expenses in the weeks to come until production and supply return to full capacity.
In uncertain times like these, you might want to increase your emergency fund balance.
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