[Project Lifeline] Is it wise to avail of ECQ grace periods for loan payments?

Project Lifeline is running an advice column for business owners navigating the challenges brought about by the coronavirus pandemic.

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The information provided here does not, and is not intended to, constitute legal advice. All information is for general informational purposes only. 

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Dear Project Lifeline,

I would like to clarify the inclusion of past due accounts in the granting of the grace period during the enhanced community quarantine (ECQ). Since the lenders can still charge interest under the grace period, this will mean additional interest on the part of the borrower. 

I am wondering whether it is a wise move to avail of grace periods for loan payments under the Bayanihan to Heal as One Act. Is it better, in the long run, not to avail of it?

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Dear borrower,

The Bayanihan to Heal as One Act provides a minimum grace period of 30 days for loan payments due within the ECQ period. A common misunderstanding is that the law grants a complete waiver of the interest, penalties, and other charges due within this period.

It does not.

The law and its implementing rules merely provide a deferment of the loan payments falling due within the ECQ period.

Simply put, the grace period provisions effectively move all loan payments to a later date which, based on the extended ECQ period, is a date after May 31, 2020. (READ: DTI sets 30-day grace period for residential, commercial rent)

Lenders, however, are still allowed to charge interest during the grace period as what is merely prohibited is the imposition of “interest on interest, penalties and other charges.” This accrued interest may be paid by the borrower in lump sum on the new due date or on a staggered basis over the remaining life of the loan.

Here is an illustration using a 15-year loan with a remaining maturity of 10 years after the lifting of the ECQ. If a monthly amortization payment amounting to P70,000 is due on March 20, 2020, and such amount is applied to the payment of principal (P40,000) and monthly interest (P30,000), the adjusted payment date, applying the grace period, is June 20, 2020.

The payment due would be the principal and interest payment for 1 month (P70,000) plus interest accrued during the 90-day grace period (P30,000 x 3 months = P90,000) which totals P160,000. The borrower has the option of paying the accrued interest on a staggered basis over the remaining life of the loan. (READ: Webinar: How small businesses can get help from gov’t, banking sector) 

Instead of paying the accrued interest of P90,000 on June 20, 2020, the borrower may pay it in monthly installments of P750 (P90,000 divided by 120 months) for the remaining life of the loan. Hence, if the borrower opts for payment of interest on a staggered basis, the total payment to be made on July 20, 2020 shall be P70,750. This principle also applies to other amortization payments due within the ECQ period.

Is it advisable to avail of the grace period under the Bayanihan law? It depends.

If you are not liquid or if you anticipate difficulty in paying your loan amortizations, then it is wise to avail of the grace period for loan payments, including the payment of the accrued interest on a staggered basis. This would provide you with some breathing room for your finances and free up additional cash which you can use for your business and other needs especially during this pandemic.

However, if you have excess funds, it would be more prudent to continue paying your loans based on the original amortization schedule. Availing of the grace period entails additional interest expense as illustrated above.

Most likely, your excess funds allotted for loan payments are lodged in a savings account or short-term placement which yields a lower interest income or return compared to the additional interest expense you will incur for availing of the grace period. If you avail of the grace period when you have surplus funds, you will therefore be incurring unnecessary interest costs.

Moreover, banks may take into consideration your availment of the grace period when assessing your creditworthiness for future loan availments or for purposes of loan repricing. For these reasons, it would be prudent not to avail of the grace period if you have excess cash.

There are numerous relief measures contained in the Bayanihan law and other government issuances. While it is wise to be aware of these measures and their corresponding benefits, it is equally wise to consider their finer points. – Rappler.com

Lawyer Jerry Coloma III has been recognized by two international publications as a leading practitioner in corporate and commercial law. He advises prominent domestic and foreign companies on a broad range of commercial activities, such as mergers and acquisitions, public-private partnerships, joint ventures, corporate reorganizations, corporate setup, transaction structuring, contract negotiations, financing arrangements, and securities transactions.