The announcement of another interest rate hike last month, to a 14-year high, has made it harder for many South Africans to meet debt commitments such as student loans, vehicle finance and housing bonds.
One option when you are under financial pressure is a “payment holiday”. This is a short-term break that allows you to pause or reduce loan repayments for a set period. During the Covid-19 pandemic, for example, some major banks offered payment holidays, often for one to three months.
JustMoney.co.za, a site that helps South Africans make good money choices,
explores whether you should approach your lender for this form of financial relief, and what the consequences may be.
Why consider a payment holiday?
A payment holiday generally applies only in the event of a short-term loss of income, for example owing to a medical emergency or unpaid maternity leave. This is according to Dr Stephan van der Merwe, senior attorney at the Stellenbosch University Law Clinic.
There are exceptions to the rule, however, and you can approach your creditors should you simply be 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 the conditions.
“It may strengthen your argument if you have a plan to show that your financial setback is temporary,” Van der Merwe says. “A payment holiday is not a way to get out of debt – but it is better than ceasing to pay altogether.”
One of the criteria for a payment break is that you must be in good standing, which means you are up to date with payments and have conducted your relationship with your lender responsibly, notes Shafeeka Anthony, Marketing Manager of JustMoney.
What are the financial consequences of a payment holiday?
A payment holiday is simply a deferral, so it does not negate your credit agreement. “As soon as the payment break is over, you’ll have to resume paying what you owe,” says Anthony.
“The interest you incur during the payment holiday will be added to the total balance due. You’re unlikely to repay a larger amount each month, so it will take longer to pay back the debt.
“There could also be non-interest administration fees. All of these factors may impact your repayments after the break, and potentially affect your credit score.”
Assess your current financial situation, weigh the potential consequences, and explore alternatives before committing to a payment holiday, advises Anthony. Some alternatives are as follows:
A term extension on a loan. This will decrease your monthly instalment; however, fixed assets have maximum terms that cannot be exceeded. The full term for a home loan is 30 years. Vehicle loan terms depend on the age of the asset and whether you’re due to make a residual or “balloon” payment at the end of the loan term.
An overdraft facility. This makes sense provided that the fees, penalties and interest charged on the overdraft are lower than the amount you would need to repay after a payment holiday. Taking on debt when in financial distress is unwise, so be cautious.
Debt consolidation. If your expenses exceed your income, applying for debt consolidation may be a good idea, provided you choose a reputable institution. Consolidation gives you a longer term to pay back debt, at a lower interest rate.
“In conclusion, while a payment holiday may seem like an easy option, it has significant long-term implications,” says Anthony.
“Taking proactive steps such as budgeting, seeking financial advice, or exploring alternative repayment plans may be more beneficial in the long run. By planning carefully and making informed decisions, you can better navigate financial challenges while safeguarding your financial well-being.”
- Read a JustMoney article on how to break poor credit habits.
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