The term ‘Payment Holiday’ may be something you’ve heard thrown around by your financial advisors or debt counsellor, but what is a payment holiday, and is it something worth looking into?

What is a Payment Holiday?

A payment holiday is a feature offered by some banks on your loans and mortgages that allows you to miss an occasional monthly payment, agreed to in advance. It is important to note that payment holidays don’t apply to everyone. Due to strict insurance regulations, people who are self-employed or are seen as a commission earner won’t qualify for a payment holiday. On top of that, you also need to be in good standing with your bank as consumers currently in arrears won’t qualify.  Simply, a payment holiday is a quick fix for short term financial problems.

How does it work?

You will need to submit an application to your bank, landlord or whoever your lender is, and once your application has been accepted, your account will be put on hold for up to 3 months. This means that during this time, you don’t have to pay your monthly repayment. Keep in mind, during this time, your credit score won’t be affected.

It is important to know that banks will still charge interest as normal during this period (as well as your monthly account fees) which means your interest rate will continue compounding. This means that your total debt amount will be more than the original total. For example, if your original loan term was 24 months, the bank will extend it to 27 months and will charge interest for all 27 months.

While a payment holiday may seem like a positive solution to your financial strain, the effects of going this route may do more damage in the long run as the cost of your loan will increase through extending the term of your loan. This is a reason why many consumers find a payment holiday to end up being a debt trap more than anything else.

It is important that you consider the terms and conditions of a payment holiday before diving in head first. As mentioned, a big down side with this option is that you end up paying more than you originally would have. You should take this into consideration, and how it will end up affecting your budget in the months to follow. Ask your financial for their advice and opinion on a payment holiday to receive clarity on how much you will pay at the end of the 3 months. An upside to this option is, through the temporary relief that you will receive, your credit record won’t be tainted due to any missed payments.

Annelene Dippenaar, chief legal and compliance officer at credit data company Experian Africa explains that there are actually two types of payment holidays. She says that majority of the banks have introduced payment holidays for consumers, as well as small and medium business who are experiencing challenges that meet the bank’s applicable criteria. One option you are provided with, is to delay the date of your next instalment, while the other option is to extend the terms of your agreement and pay the loan back over a longer period of time. She says that it’s also important to remember that just because your lender offers a payment holiday, doesn’t mean you will automatically receive one. You need to formally apply.

So, what should you do?

A payment holiday isn’t your only option. A good idea is to ask your lender if you have credit insurance linked to your loan. The purpose of this policy is to protect the borrower in the case of death, disability or unemployment. Not all policies are the same, so be sure to have a look at the terms and conditions of your loan.

There are other options available to you if you or someone you know finds themselves in a position where your debt is starting to get the better of you. If you are in this position, Exonerate may be able to help you.

We can sit down with you to discuss what option may work best for you, and we can have a look into the possibility of debt review. Debt review offers relief to consumers who can’t afford all of their monthly expenses. This is a viable option for consumers who have an income but are struggling to keep up each month with repayments.

Please remember to reach out for help before it becomes too late!