Know the pros and cons of a ‘payment holiday’
Before agreeing on a payment holiday for your debt, make sure you understand the terms and conditions.
POLOKWANE – The financial stability of not only businesses, and subsequently ordinary citizens have come under immense strain during the past weeks.
Understanding these trying times, certain financial institutions and creditors have granted their clients what is regarded as a payment holiday on their payments. This would allow clients to postpone their repayments by three months even though the interest will still accumulate.
A financial advisor from a local bank, Junior Rakgoale, it is important to realise that certain customers have during the lockdown lost a huge part of their income. “Banking institutions will generally try to assist in pro-longing their paying period. We have added two or more months to their debt payments so that when the lockdown ends, we can continue deducting from their accounts once they’re financially stable. The result is that they will be paying their debt off over an extended period as there is interest involved.”
“This payment holidays allows our clients to delay their repayments for up to three months, but they interest is still calculated on the balance of their loans, including their usual monthly fees. So before taking this option, they have to understand the terms and conditions thoroughly,” he says.
The good thing about a payment holiday, Rakgoale says, is that it gives customers one less thing to worry about when their income has temporarily dried up.
“We know people stress about their income; therefore, they don’t need to stress about their debt as well. If they need a payment holiday, we advise that they contact an advisor sooner than later.”
Customers should also consider the long-term impact of a payment holiday before agreeing. “Make sure your bank or financial institution explains the terms and conditions and that you fully understand these terms.”
There are disadvantages of a payment holiday: you will end up paying more in the long run than what you expected.
“Your outstanding loan balance and payments will also be higher than they previously were. You should consider how it will affect your budget in the months to come,” Rakgoale advises.
He says besides a payment holiday, there are other options to consider. “You should ask your bank lenders whether you have credit insurance linked to your loan or not. This policy is meant to protect the borrower in the event of death, disability or unemployment, and is a way of preventing borrowers from falling deeper into debt. Just keep in mind that not all policies are the same, so you should check the terms and conditions of your loan.”
Since repayments will be delayed for up to three months during a payment holiday, the obvious question to ask is whether this will affect your credit score, and as many people are going through a tough time right now, lenders may be putting measures in place to ensure credit scores are not negatively affected.
“To be on the safe side, ask your bank if and how the payment holiday will affect your credit score. If you can, at all, pay your debt during the lockdown, the safest thing is to do so to avoid interest adding up in future,” he concludes.
