Are “payment holidays” a wise idea?

With the announcement of yet another interest rate increase, South Africans are looking for ways to reduce costs and escape debt. This includes “payment holidays”, a process that enables customers to pause or reduce loan repayments for a set period.

We explore whether you should approach your lender for this form of financial relief, and what the consequences may be.

Tip: Did you know consolidating your debt can help to improve your cash flow? Find out more here.

Why consider a payment holiday?

A payment holiday gives you short-term relief from paying some or all of your loan instalments. In general, it applies only in the event of a short-term loss of income, owing, for example, to a medical emergency or unpaid maternity leave, notes Dr Stephan van der Merwe, senior attorney at the Stellenbosch University Law Clinic.

However, there are exceptions to the rule, and you can approach your creditors in the event that you are simply unable to pay your bills.

The national credit act doesn’t make mention of payment holidays, so you and your creditor will need to come to a mutual agreement. It’s wise to ask for this in writing so you’re both clear on what’s being agreed. 

“It may strengthen your argument if you have a plan to show that your financial setback is temporary,” Van der Merwe advises. “A payment holiday is not a way to get out of debt - but it is better than ceasing to pay altogether.”

What are the financial consequences of a payment holiday?

Because a payment holiday is simply a deferral, it does not negate your credit agreement. It can, however, help you to ensure you don’t skip payments, and thus protect your credit score.

“A payment holiday is an indulgence granted by your bank,” says Standard Bank spokesperson Ross Lindstrom. “You will be charged fees and interest, however, which will increase your outstanding balance.”

“Alternatively, you can ask your lender if the loan term can be extended by the payment holiday period, which will keep the repayment amount roughly the same.”

Which loan should you prioritise?

Although you can apply for a payment holiday on any loan, the greatest relief is usually found with a home loan.

Let’s say, for example, that, owing to the recent interest rate increase, your expenses now exceed your income by R1,500. If your debt includes an account with an outstanding balance of R10,000, with monthly repayments of R2,000, and a monthly bond instalment of R5,000, by taking a two-month holiday on your home loan, you’d be able to settle the R10,000 account in full. 

You could then focus on your home loan, and have R500 a month to spare – provided there are no further interest rate hikes, and your creditor agrees to extended home loan repayment terms.

Other possible financial solutions

A term extension on a loan will decrease your monthly instalment, but fixed assets have maximum terms that cannot be exceeded. The full term for a home loan is 30 years, while vehicle loan terms depend on the age of the asset and whether you’re expected to make a residual or “balloon” payment at the end of the loan term.

An overdraft facility makes sense provided the fees, penalties and interest charged on the overdraft are lower than the amount you would need to repay after a payment holiday on the loan, says Van der Merwe. However, taking on debt when in financial distress is unwise, so this should be considered carefully.

If your expenses exceed your income, applying for debt consolidation may be a good idea, provided you choose a reputable institution to assist you. Lindstrom says this gives you a much longer term than unsecured debt, and it is offered at a lower interest rate.

Tip: Consolidating your debt may allow you to repay existing loans at a lower interest rate.