A loan is usually a commitment for many years. There are times when we would like to take a break from monthly repayment or find ourselves in a situation forcing us to temporarily cease regular payments. In such situations, we can take advantage of not very popular credit holidays or postponement of the repayment date. What are credit holidays and how do they work? Let’s see!
People who have a bank loan, have to reckon with the fact that they will have to set aside a certain amount from the household budget, which will be used for monthly repayment. In addition, the very awareness that the borrowed amount (capital), and with it “remuneration for the bank” in the form of interest, commission, insurance or other fees, may discourage payment of liabilities. By signing the loan agreement, we have consciously agreed to such terms.
Monthly, high installments often become quite tiring for the payer, and people who have unexpected financial problems can feel this difficult situation even more. In this case, the worst choice will be to refrain from repayment or not to try to contact the bank in order to inform and explain the situation. An even worse solution may be taking further loans or repayments for previous ones. Doing so is a straight path to a debt spiral.
A reasonable action, even before the day when we have to pay the monthly installment, will be to inform the lender about our financial situation, and to try to renegotiate the terms of the loan agreement, which will result in extending the loan period or postponing the payment of the next installments.
What are credit holidays?
Banks want the borrower to regularly repay his liability. In case of problems, despite appearances, he is willing to help. Most banking institutions, in loan agreements or credit granting regulations, place provisions enabling temporary suspension of repayment of liabilities on a written request of the borrower. This solution is called credit holidays. Loan holidays are a deferred payment of the principal and interest installment of a mortgage loan or cash loan. Depending on the bank, they are granted for different times and on separate terms. Credit holidays are a banking product intended mainly for people who are struggling with temporary financial problems, caused for example by unexpected expenses, serious illness or loss of job. This does not exclude that credit holidays can also be used by people with no financial problems who simply want to take a break from paying the installments on a monthly basis.
Credit holidays and grace period
The conditions under which we can take advantage of credit holidays as part of credit or loans are set individually by the bank. Most often we will come across information that banks give their borrowers the option of suspending the repayment of one installment – once a year. Some banks only allow this solution once every few years. In addition, there is often a limit on the maximum total number of breaks in repayment, which can be, e.g. 3 times during the whole contract.
It is worth being aware that credit holidays, i.e. temporary suspension of loan repayment, are not the same as grace period. The latter concept usually consists of postponing the time when the repayment begins. It is quite a popular procedure used by banks. To better understand the difference – for example, at the end of the year, the bank advertises an occasional loan for pre-Christmas shopping, encouraging potential borrowers with a promotion that informs that the first installment repayment falls after the New Year. In the case of a mortgage, it could be information that the loan repayment begins after the construction of the house. Let’s not forget that this is not a free service offered by the bank. Interest for the grace period is included in the cost of the loan.
Who can take advantage of credit holidays?
Nowadays, credit holidays are becoming more and more popular. We can use them with a cash loan, mortgage or even a loan for any purpose. Currently, not only banks give us the opportunity to take credit holidays. Non-bank companies also offer this option to their clients.
As we have already mentioned, the conditions on which we can take advantage of credit holidays are set individually by the bank. To be able to use them, we must demonstrate that we can pay our obligations in installments on time. Most often, after about 4-6 months, we can apply for a credit vacation, i.e. suspension of repayment of another, or several future installments. In the case of longer liabilities, timely repayment of the minimum 12 first installments of the loan may be required.
How to take advantage of credit holidays?
We will learn about the credit or loan agreement if and on what terms we can take advantage of credit holidays. The very fact that we want to use this option should be reported to our bank or lender about 2 weeks in advance, so that he can respond to him. In some banks, this period may be only up to 3 business days before the date of payment of the next installment. Most institutions require that you submit an application in writing at a branch or use online banking. A large proportion of banks do not require justification of the application.
It is worth noting that a bank or non-bank institution may refuse to grant credit holidays. This usually happens when we do not pay our liabilities diligently.
Credit holidays in banks
The period for which credit holidays are granted varies depending on the bank selected. The following table contains cash loan offers from popular banks in Poland. With each of them we will learn what the minimum and maximum amounts we can apply for, as well as the loan period and the period for which we can take a credit vacation.
How much do credit holidays cost?
As for the grace period, the interest for its duration is included in the loan costs. And what about credit holidays? Well, this is also not a free service, and the postponement of repayment of loan installments is associated with an increase in the total loan amount. When renegotiating the contract, the bank or other financial institution will provide us with several options that will affect the final increase in our commitment. Here they are:
- increase in subsequent installments – we will pay higher installments, but the loan period will remain the same
- extension of the loan period – we will pay the same installments, but the loan period will be longer
- settlement of outstanding loan installments along with the last installment of our loan
- determining individual conditions for credit holidays
We can also come across a certain variety, which is the incomplete form of credit holidays. In this solution, only the principal part of the loan installment is suspended and the interest part should be paid on time. The unpaid capital will be divided into as many parts as we have credit installments remaining, and then added to them, which will increase the next installments.
When using credit holidays, we will have to pay an additional fee for the bank agreeing to grant us such a break. It is usually set as a percentage of the remaining amount to pay the liability and we can often find a provision in the contract that “it is an amount not less than PLN X.”
What should we pay attention to?
The conditions associated with granting credit holidays, each bank sets individually. The exact rules and guidelines can be found in the contract we signed. Let us remember that during the repayment of our loan, we can take advantage of credit holidays as well as incomplete credit holidays. Let’s also check whether credit holidays at our bank involve additional fees and how much they amount to. In some banks it is a completely free service.
Is it worth taking advantage of credit holidays?
If we are in a temporary difficult financial situation, the costs incurred resulting from taking advantage of credit holidays may be much lower than those we may be exposed to in the event of avoiding repayment of liabilities – e.g. increasing interest rates, payment requests or prompting fees. In addition, we will lose the status of a credible and reliable borrower, which may negatively affect our relations with financial institutions in the future.