Payment holidays: Are they worth it?

In trying to cope with the difficult times, you might have considered deferring your debt repayments to a later period. While this will give you some breathing space, payment holidays may come with more complications than you need - or want.

It is worth giving the decision some good thought before you proceed to take a payment holiday or pause. Read on to find out if they are really to your benefit.

What is a payment holiday?

A payment holiday is an agreement you make with a credit or loan provider, which allows you to pause your payments for a pre-arranged time period.

Most often they are given to consumers when they are not able to keep up with repayments. However, there are conditions to this arrangement. We will get to these a bit later.

How long can I pause repayments for?

Payment holidays allow you to take a break from your repayments for a certain period — usually one to three months. As soon as that period is over, you’ll have to resume paying what you owe. By that time, not only will you pay more on interest, but your repayment period will be longer.

Are payment breaks worth it?

The term will not only be extended by the number of months you’ve missed, but your debt will be determined by how much interest and administration costs you’ve incurred as a result of the payment holiday. This is of great importance if you have long-term debt like a bond. Do you want to have debt that lingers longer than necessary?

What are the long-term effects of payment breaks?

If we look at the bigger picture - by the end of the payment holiday, you most likely will have more problems than you began with. This is how a payment holiday will affect you:

• You continue to incur interest during the payment holiday. This interest will be added to your total balance due. So, at the end of the payment holiday you’ll have more to repay than you had before.
• The term of your loan will be elongated. The only way to reduce the elongated period is to increase your monthly instalments, which is not ideal.
• Your credit score will be negatively affected because of the deferred payments. Following from that you may be hindered in your ability to take out additional credit and be approved for loans. Remember, your credit score plays a big role in your financial mobility.

How does one sign up for a payment break?

To get a payment holiday, you simply have to request it from your lender. They, however, are not obligated to agree to it.

Before they grant you the pause, they will likely ask you a few questions about financial circumstances to determine if you are eligible for this option. While you will not be required to explain why you need the payment holiday, you will be asked about how the payment holiday will help you in the long-run. In other words, you will be required to provide strong motivation for the payment holiday.

Another noteworthy point about payment holidays is that you are unlikely to get one if you already have a bad reputation with payments. If you’re in arrears, have a bad credit score, are seen as high risk, and are known to miss payments, then you will not be eligible. This is because the creditor may be skeptical of your return to payments.

What you can do instead of taking a payment holiday?

If your debt is in the final stages, think about paying the interest only. This is to make sure that your debt doesn’t grow because when you miss your payments, your debt accumulates compounding interest.

That means the interest you didn’t pay the previous month will accumulate interest in the current month.

Struggling to repay your loans?

A payment holiday may not be in your best interest if you’re already struggling to make repayments, as you can probably tell from the above information. So what can you do to get yourself unstuck from your financial ditch?

Debt counselling is your best bet if you’re struggling with your debt.

What is debt counselling?

The National Credit Act of 2007 formally introduced the process of debt counselling, which is a solution to debt. When someone is found to be over-indebted, a debt counsellor may help them through the process of debt review.

In the process, a debt counsellor will negotiate with creditors on behalf of the over-indebted person, in order to lower monthly payments and interest rates. In addition, the debt counsellor readjusts the clients financial plan and budget, considering the new interest rates and payments. As a result, the client will be able to make monthly repayments that they can actually afford.

How do I start debt counselling

If you’re feeling debt-stressed and financially overwhelmed, you can get in contact with a Debt Counsellor. Just ensure that they are accredited and know their stuff!.

The debt counsellor will assess the level of your indebtedness, and if you’re deemed over indebted, you’ll be approved to undergo debt counselling. Being over-indebted means that your monthly debts and expenses are more than your monthly income. Those who are determined to be on the brink of over-indebtedness will also be accepted into the process of debt counselling.

From there, the debt counsellor will notify your creditors and negotiate with them, and then you’ll be on your way to paying your debts in an affordable way.

How long will debt counselling last?

How long you stay under debt counselling depends on the amount of debt you have.

Usually, the process takes about three to five years — and in some isolated cases, six years. Throughout these years, you’ll pay the amount you’re comfortable with and you’ll have no creditors hounding you.

What happens when you finish debt counselling

When you complete the debt counselling process, you’ll receive a Clearance Certificate that proves that all your debt that was under the debt counselling contract has been paid off.

Not only that, but you’ll come out with better money management skills and the opportunity to repair an unfavourable credit score.

To find out more about how debt counselling can help you cope in tough times, contact DebtBusters on 086 999 0606, send an email to info@debtbusters.co.za, or fill in our free call-back form.