Credit card users to gain more from ‘interest on interest’ waiver

(This story originally appeared in on Oct 05, 2020)

NEW DELHI: The government’s decision to waive “interest on interest” during the March-August loan moratorium period will benefit all individuals with loans up to Rs 2 crore but if you have a home loan, especially one that was availed several years ago, your savings will not be much. However, if you have outstanding credit card loans or dues, the benefits will be quite substantial since interest rates range between 19.5% and 42.4% per annum.

The point to note, a public sector bank official said, is that the government’s proposal waives interest on interest during the moratorium, but borrowers still have to pay the simple interest for the moratorium period.

To explain how the interest on interest waiver works, let’s take the case of a Rs 2-crore home loan taken in March 2015 with a tenor of 20 years. In March 2020, when the moratorium first kicked in, the outstanding amount would have been a little over Rs 1.75 crore. A simple interest of 8% for six months would translate to Rs 7 lakh. This is just the interest burden, which will have to be borne by the borrower. If this amount is not paid in one shot in September and clubbed with the principal, then the repayment period will be extended by 20 months, 17 days with the waiver.

Without the waiver, the borrower would also have to pay interest on interest at 8% on this Rs 7 lakh for six months. This amount, based on compound interest, adds up to Rs 11,774, and will effectively become your gain as it has been waived. However, it doesn’t mean cash in hand but rather a shorter loan tenor.

However, in the case of credit cards, an outstanding amount of Rs 1 lakh would mean a borrower would have to pay Rs 19,336. With the waiver, the interest outgo is Rs 17,940, so the benefit will be Rs 1,396 during the six-month period.

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