Why hitting pause on your loan might cost you more

While the RBI is not currently offering a blanket moratorium as it did during the pandemic, many banks and financial institutions still offer borrower-specific moratoriums or restructuring options in 2025.

In moments of financial stress like a job loss, a medical emergency or a sudden dip in income, being offered a pause on your loan payments can feel like a lifeline. A moratorium, which allows you to temporarily stop paying EMIs or equated monthly instalments may seem like the ideal escape hatch. But as comforting as it sounds in the short term, hitting pause can come with long-term costs in the fine print that are often overlooked.

Let’s break it down in human terms: imagine pausing your Netflix subscription for a few months. When you return, everything’s where you left it but with loans, the unpaid months don’t just freeze, they silently grow. Here’s what’s really happening behind the scenes and why opting for a moratorium might not always be the smartest move.

A loan moratorium is a temporary relief provided by lenders that allows borrowers to defer their EMIs for a specific period typically during financial crises like, say, the COVID-19 pandemic or under special Reserve Bank of India (RBI) guidelines. During this break, you’re not required to make payments—±but the interest on the loan doesn’t stop accruing.

Importantly, while the RBI is not currently offering a blanket moratorium as it did during the pandemic, many banks and financial institutions still offer borrower-specific moratoriums or restructuring options. These are extended in genuine hardship cases such as job loss, illness or natural disasters.

Leading institutions such as State Bank of India, ICICI Bank, HDFC Bank and LIC Housing Finance offer such relief on a case-by-case basis. Borrowers must formally apply and demonstrate their temporary inability to repay. Most lenders require the loan account to be in good standing (i.e., not overdue by more than 90 days) and evidence of temporary hardship like termination letter, medical bills or regional calamity reports. So, while moratoriums haven’t disappeared entirely, they’re no longer handed out en masse, they’re selectively available and carefully vetted.

Let’s say you take a moratorium of three months on a Rs 5 lakh loan with a 12 percent annual interest rate. While you might enjoy those payment-free months, interest continues to pile up in the background. Once the moratorium ends, this interest is added to your outstanding principal. This results in either higher EMIs or a longer loan tenure, sometimes both.

Example: Ravi had a Rs 5 lakh personal loan at a 12 percent annual interest rate for a five-year term. Facing a temporary cash crunch, he opted for a three-month moratorium. During this period, interest of around Rs 7,500 accrued, which was added to his outstanding principal.

When repayments resumed, either his EMI amount increased or his loan tenure was extended to cover the additional interest. In the end, Ravi paid over Rs 10,000 more than originally planned. What seemed like a short-term relief turned into a costlier repayment over time, demonstrating how a moratorium can quietly inflate your loan burden.

So essentially, the three months of relief might lead to you paying more over the life of your loan. It’s like borrowing more money just to not pay money for a short while. That’s not free, it's delayed debt with a premium price tag.

Interest during the moratorium period doesn’t just stop at being a one-time thing. Often, it’s compounded. That means the interest you didn’t pay also starts accruing interest. Over time, this snowballs into a much bigger financial burden. The longer your remaining loan tenure, the more this compounded amount costs you.

This is particularly tricky for longer-term loans like home loans or education loans where even a small pause can create a ripple effect across years.

One of the biggest misconceptions is that a moratorium will hurt your credit score. In most regulated scenarios, lenders report the paused payments as ":deferred" or "under moratorium" and not as "missed", so your score remains untouched. But the real impact is financial, not numerical.

You may not see a dip in your CIBIL score, but the increase in total repayment, the added stress of prolonged EMI obligations, and the reduced future borrowing capacity due to a higher debt load are consequences that don’t show up on a report until it’s too late.

Despite the drawbacks, there are cases when a moratorium can be a real blessing:

●        You've temporarily lost your source of income.

●        You are facing a medical emergency or a personal crisis.

●        You have no liquid savings or fallback fund to manage EMIs.

In such cases, the choice is not between "paying more" or "paying less" but between staying afloat or drowning. If a moratorium helps you avoid a loan default or legal troubles, it may be worth the extra cost. But it should be a calculated move, not a reflex reaction.

If you’re struggling with your EMIs, consider alternatives first:

●     Speak to your lender: Some banks offer restructuring, step-down EMIs, or temporary relief on interest rates without full moratoriums.

●     Use your emergency fund: That’s what it's there for. If the financial pressure is short-term, it’s better to use your savings than take a costly loan pause.

●     Cut non-essential spending: It’s surprising how a few small lifestyle tweaks can help you stay on track with your EMIs.

●     Explore a top-up or consolidation loan: If you have multiple loans, consolidating them into one with a lower interest rate might ease the burden.

Taking a moratorium is like hitting the pause button on a treadmill—you might stop moving, but the belt keeps running. When you jump back on, it’s faster and harder to keep up.

Yes, life throws curveballs. But before opting for a moratorium, understand that it is not a waiver or forgiveness—it’s a delay with strings attached. Use it only as a last resort, and always with your eyes wide open to the long-term costs.

Because when it comes to loans, what seems like a break today can quietly become a burden tomorrow.