Although often used as synonyms, the moratorium and the grace period represent two different forms of standstill in repayment of credit obligations. The term “standstill” implies a standstill in the repayment of the principal because the borrower pays interest to the lender during the standstill period.
Waiting for prospective clients
The grace period represents the grace period that the creditor grants to the borrower in order for the latter to fulfill the prerequisites for an orderly repayment of the loan (start a business, generate stable income, etc.). Most often, the loan beneficiaries decide to wait for a home or investment loan.
Example: After taking the bar exam, the lawyer gets a monthly salary increase, which makes it much easier to repay the loan regularly.
Moratorium as a respite
The moratorium marks the termination of repayment of a fixed-term loan to give the borrower a respite to deal with repayment difficulties in times of severe economic disruption.
Given the socio-economic situation of citizens and their inability to repay loans on a regular basis, it is not surprising that they often opt for a moratorium.
It is a much more favorable option to pay contractual interest on the loan for one year (moratorium) than default interest and foreclosure costs in case of inability to pay the loan.
Debtors who meet the requirements of the moratorium
Clients who duly fulfill their existing financial obligations, but due to changing circumstances, foresee difficulties in repaying the loan (job loss, reduced monthly income, maternity leave, irregular monthly income, etc.), have the right to request termination of repayment of the fixed term loan.
The moratorium can be arranged for home loans, but also for non-purpose loans (cash, mortgage, etc.).
During the moratorium, no loan principal is repaid
Depending on the commercial bank and the individual situation of the client himself, the moratorium is negotiated in the following ways:
A. free of charge with the extension of the repayment period by as many as the moratorium lasted. Given that the monthly annuities remain unchanged and the client is completely exempt from payment during the moratorium, this is the most favorable option for the client.
B. with a repayment of usually 1% to 3%, which will be added to the remaining debt on the loan. The principal of the loan plus the repayment fee will be subject to contractual interest for the entire remaining repayment period. Annuities (for the remaining repayment time) on principal plus compensation are also calculated.
C. during the moratorium the user pays interest or a portion of the interest. In the moratorium, repayments of principal are dormant. The outstanding amount of principal (or principal and interest) during the moratorium is allocated to the remaining repayment period, which remains unchanged. Annuity is calculated based on the new loan principal amount.
Example: A client has contracted a home loan of $ 50,000.00 for 20 years at a nominal interest rate of 5.99% (EIR 6.22%). Repayments are made monthly in equal annuities of $ 357.93. An annuity consists of principal and interest.
The table shows that if a client had agreed to a grace period of 60 months for 12 months, his annuity during the grace period would be $ 212.58. The monthly commitment would decrease by $ 145.35. Should the same client decide on a moratorium in the 180th month of repayment, the monthly repayment installment would be $ 93.75, or the monthly obligation would be reduced by $ 264.28, which would make it much easier for the client to repay the loan.
The procedure itself usually takes two to three weeks.
Borrowers who meet the criteria must submit a Request for a Moratorium.
Then the client collects the necessary documents and updates the security instruments as needed.
The Bank prepares an annex to the loan agreement that regulates the conditions of the moratorium (the amount of the fee, the total cost of the moratorium, the new repayment plan, the amount of the loan annuity increase, the repayment extension deadline, etc.).
After the annex is signed, a change of credit is introduced into the system.
The loan ultimately turns out to be more expensive
Depending on the loan repayment period in which customers decide on a moratorium, the price may be quite substantial but hardly noticeable. Although the loan principal is dormant, interest is usually paid, either in full or reduced, meaning that the moratorium has its price.
In addition, additional costs such as an annex contract fee, notarization, etc. are also paid.
However, it is always a cheaper option to claim a moratorium than to become a messy payer and save the financial situation through rescheduling loans, which includes additional security instruments and loan processing fees, which significantly increases the cost of the loan and leaves a lasting negative mark on the customer’s credit report.