Definition: The Moratorium Period is the time during the loan term in which the borrower in not required to repay the loan. It is the relaxation time given to the borrowers before beginning with the loan repayment in the form of EMIs.
The education loan is a very good example that features the moratorium period scheme, where the loan repayment begins after the student completes his education and starts earning. There might be a time gap between the period a student completes his education and get into some job. Therefore, the flexible loan repayment structure is designed to help students accomplish their career objectives.
Now the question may arise, that how the banks will compute the interest on the loan amount? Well, under the moratorium period, the bank will calculate the interest on the loan (say, education loan) on a simple interest basis. The interest will be calculated on the amount actually disbursed and not on the whole amount of the loan.
The interest so calculated until the end of the moratorium period gets accumulated and is added to the principal loan amount. Therefore, the EMIs and future interest will be computed on the basis of the total amount, i.e. principal amount + accumulated interest amount, which needs to be paid by the borrower after the waiting period is over.
Some banks offer concessional interest rates for those who wish to pay the interest amount during the moratorium period. Thus, the moratorium period provision gives more time to the borrowers to pay their debts and overcome their rough time with an ease.