A payment holiday frees a borrower from paying the monthly loan instalments for a certain period of time. It can be useful if a cash shortage of short duration needs to be bridged. We show you here what the requirements for a payment holiday are and what advantages and disadvantages it has.
Payment holiday: Meaning
A payment holiday is an agreement between the borrower and the lender to suspend payment of one or more monthly instalments under certain conditions.
Payment holiday is used when the borrower has problems paying the monthly instalments. During a payment holiday, interest usually continues to accrue. This means that the monthly instalments increase when the borrower pays the instalments again after the payment holiday.
It is therefore important to clarify in advance to what extent the payment holiday will affect the interest burden, so that you as a borrower do not experience any unpleasant surprises.
Payment holiday in the UK
In the UK, it is generally possible to ask the lender (e.g. a bank) whether it can grant a payment holiday. However, the lender is not obliged to do so and always decides on a case-by-case basis whether and under what conditions to grant a payment holiday.
The borrower must explain why he or she wants to take out a payment holiday. The lender then takes a close look at the borrower's financial situation and discusses the options and conditions with him.
Payment holiday: How long can it last?
The length of a payment holiday depends on the borrower's financial situation and the lender's assessment. Anything is possible between the suspension of a single monthly instalment and a payment holiday of up to twelve months.
If the borrower only has a short-term cash shortage, it is often sufficient to suspend only one or up to three instalments until the shortage has disappeared again. If it is foreseeable that the shortage will be of longer duration, the lender may grant a payment holiday of half a year or even longer.
However, it always depends on how the borrower's future financial situation is assessed. If it is foreseeable that the payment difficulties will be of a longer duration, the lender can also reject the request for a payment holiday immediately.
Payment holiday: How often can you take one?
Just like the duration of the payment holiday, the lender also determines how often a borrower can suspend his monthly loan payments. Some lenders only grant a one-off payment holiday per loan, while others allow you to suspend your instalment payments more often.
Does a payment holiday affect credit?
A payment holiday has an impact on your credit score, which can make it harder to get further loans in the future. The more often you request a payment holiday and the longer they are, the more negative your credit score becomes.
A payment holiday should therefore only be a last resort if you absolutely can no longer afford the monthly instalments.
Pros and cons of a payment holiday
The advantage of a payment holiday is that the financial situation can relax again during this period. Borrowers are not in default during this period and do not have to worry about the lender cancelling the loan agreement and plunging them into insolvency.
A payment holiday makes sense if you know in advance that a temporary cash shortage is imminent, but that it will disappear within a few months.
The disadvantage of a payment holiday is that interest continues to accrue during this period. This means that after the holiday, the monthly instalments are slightly higher, as the additional interest is added to the monthly payments.
Another disadvantage of a payment holiday is the negative impact on the credit score, which makes it more difficult for the borrower to take out further loans in the future.
