Lockdown | To take or not to take a payment holiday?

Banks such as Standard Bank, Absa and FNB have announced that they are willing to give their customers debt servicing relief, including reducing one’s monthly instalment or taking a full payment holiday for the next three months. Insurers are also getting requests from cash-strapped consumers to freeze their cover for items like motor insurance as their wheels remain parked amid the lockdown.

With some consumers, especially those in the informal economy, sitting at home on a no-work-no-pay basis, a payment holiday would not only be a welcome relief; it could mean a difference between getting blacklisted and keeping their credit profiles intact. At most, it could help them keep a roof over their heads.

But can taking a payment holiday ever be a bad idea right now?

Mind the extra interest

Madri Jacobs, senior financial planner at Brilliance Bluestar, said cashflow of both consumers and companies will be under immense strain in the coming months, if not years. However, before taking a payment holiday, one must first consider how this will affect their budget in the subsequent months.

"If you are considering taking up the offer, make sure you review the terms and conditions. Interest might still accrue. The arrangement only extends the payment term and makes the debt more expensive. However, this could still be desirable instead of defaulting on payments," she said.

She said taking up the offer of a payment holiday just because it’s available when a person can still afford repayments would be a big mistake. "It will also be a bad idea if the terms and conditions are unfavourable. Each situation is unique and will have to be assessed carefully. Do engage with your financial planner during this time sooner rather than later."

Study the terms and conditions

Gregg Sneddon, founder of The Financial Coach, says if you can afford to continue repaying your debts, do so. "The thing is it’s not for free. Banks are being kind, but it comes at a price. Don’t opt for this unless you are absolutely desperate."

Sneddon said each bank will likely have its own conditions. But the most likely amendment to the credit agreements which consumers opt to effect payment holidays on will be the lengthening of the repayment period. In other words, if the debt was due to be repaid in 60 months, this will now increase to 63 months and interest will be payable for longer. But he doesn’t expect that banks would change the initial interest rate, unless the credit agreement is amended beyond the introduction of the three months holiday, such as in the case of applying for a credit top up.

"Be fully aware what terms of the agreement the bank is altering. Make sure you understand what you are signing."

Cash flow crunch or over-indebtedness?

Benay Sager, Chief Operating Officer at DebtBusters, similarly said that once the loan term is lengthened, this interest accumulation might translate to paying back a bit more at the end of the loan term. However, he added that one must distinguish between struggling to meet payments because you have a temporary cash flow problem, and overindebtedness.

"A payment holiday is very good news for someone who is facing a short-term cash crunch as a result of the lockdown, but it’s possible that the interest will keep running, even though payments are paused," he said.

In assessing whether you are taking the payment holiday for the right reasons, Sager said if your cash flow problems are temporary effect of not earning enough income during the lockdown, it is understandable to opt for the payment holiday.

"If the real problem is that you’re overindebted then you should consider debt counselling."

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