Following the announcement of another interest rate hike, many South Africans are finding it harder to meet debt commitments such as student loans, vehicle finance and housing bonds.
Exacerbated by the rising cost of living, it’s common to want to take a break or payment holiday on payments before you become financially overstretched.
According to JustMoney.co.za, a payment holiday is a short-term break that allows you to pause or reduce loan repayments for a set period. It was commonly seen during the Covid-19 pandemic, where some major banks offered consumers payment holidays, often for one to three months.
If you're facing financial pressure and considering taking a breather on payments, here are things you need to consider.
Why consider a payment holiday?
According to Dr Stephan van der Merwe, senior attorney at the Stellenbosch University Law Clinic, 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.
However, there are exceptions to the rule and you can approach your creditors should you simply be unable to pay your bills.
He said the National Credit Act doesn’t make mention of payment holidays, so you and your creditor will need to come to a mutual agreement and 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. A payment holiday is not a way to get out of debt – but it is better than ceasing to pay altogether,” said Van der Merwe.
What are the financial consequences of a payment holiday?
According to Shafeeka Anthony, marketing manager of JustMoney, 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.
She said 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. 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,” said Anthony.
She also advised that you assess your current financial situation, weigh the potential consequences, and explore alternatives before committing to a payment holiday.
Here are some of the alternatives to consider before taking a payment holiday, according to Anthony.
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,” said Anthony.