Summary of this article
EMI holidays give relief but increase total repayment.
Higher interest loans face bigger repayment burden later.
Partial payments help reduce interest added during breaks.
An equated monthly instalment (EMI) holiday is a break during which borrowers pause their monthly payments due to some financial reasons. This does not stop the interest from piling up. Instead, the interest keeps on gathering on the outstanding principal. The relief, though, is short term; the financial cost stretches much longer. EMI holidays are offered on loans, such as home loans, personal loans, and education loans.
How Interest Builds During The Break
The average rate of interest on home loans range from 7.30-9.50 per cent. Personal loans cost more, around 9.60-24 per cent across borrower profiles. During an EMI holiday, interest continues to accrue at the same rate. Since the interest is added every month, the total dues increase faster when the rate is on the higher side. Therefore, personal loan borrowers are hit harder compared to those with home loans.
How Repayment Changes After EMI Holiday
There are two common ways of adjusting the loan once the break is over. The first scenario is where the lenders extend the tenure. This keeps the EMI same, but increases the total number of months the borrower needs to repay. A three-month EMI holiday on long housing loans can extend the loan by 8-12 months because the unpaid interest during the break gets added to the outstanding amount.
The second method is by increasing the EMI amount. Borrowers who want to keep the tenure unchanged must pay higher EMIs for the remaining period. The rise depends upon the interest accumulated during the pause, and for loans with high interest rates, this increase could be steep.
Consider a borrower with a Rs 50 lakh housing loan at a rate of interest of 8.50 per cent. In case they take a three-month EMI holiday, the interest keeps on accumulating during those months. At the recontinuation of payments, this interest is added to the loan and, therefore, the tenure stretches by close to a year, pushing up the total repayment. For borrowers of personal loans, where rates are considerably higher, even a short break can result in a big jump in future EMIs or the tenure.
When An EMI Holiday May Still Help
An EMI holiday may help in case of an emergency, despite the long-term cost. Sudden loss of income, unexpected medical expenses, and temporary cash flow problems are some reasons that may justify a short stoppage of the EMI.
In such a scenario, an EMI holiday could be helpful for those borrowers who foresee their finances improving soon, but only if the future implications are duly considered. Further, partial payments during this holiday period reduces the extra interest that accrues over this period. Even a token amount reduces the overall burden.
Alternatives To Consider Before Taking A Break
Other adjustments can be considered by borrowers keen to avoid the higher cost associated with an EMI holiday. Partial prepayments are effective, too, as lowering the principal cuts future interest. Refinancing to a lower rate may work if current market rates are lower than the original rate.
