Payment holidays explained

Making monthly payments for a loan or mortgage is just a normal part of life for many people, like paying rent, buying groceries and filling fuel in the family vehicle. But what happens in times when it becomes difficult to make this payment? An example of this would be the current economic crisis, where many people are either working from home at a reduced salary or unable to work at all.

What is a payment holiday?

A payment holiday is not your typical “holiday” – but it is a break. Ideal for desperate times when you know you are unable to make a payment on your loan or mortgage, you can reach out to your bank or loan provider in order to start a payment holiday. This is a previously decided upon amount of time that you can “take off” from making payments towards your loan or mortgage. The time off from paying towards this loan or mortgage could relieve you of a lot of stress during an already difficult time of your life. It could also allow you to focus your finances elsewhere.

Typically, you need to be in a dire situation in order to request a payment holiday. The bank or institution will review your file and savings and see if something (like a payment reduction) can take place instead of outright pausing your payments. With Covid-19 changing the way many people live their lives, including work and making money, banks (and other such institutions) had relaxed the requirements for these payment holidays.

While the word “holiday” is a positive and enticing idea, the amount of money required to be paid back remains the same and can (and often does) increase. The benefit of having the necessary time off is lessened when the realisation comes that your total loan or mortgage may have increased as a result. However, this is a necessary part of the process.

How long does a payment holiday last?

A normal payment holiday typically lasts only as long as it is required, i.e. for the borrowers to find a job or “settle in” to another way of life. During the Covid-19 epidemic, banks listened to scientists and doctors and agreed upon a date that seemed to fit with an estimated timeline of events, such as 31 May. Whether someone goes on a payment holiday for Covid-19 or another reason, the amount of time is decided upon before entering into the new agreement.

Can I extend my current payment holiday?

Only a small handful of direct lenders will offer current customers the chance to further extend their payment holiday. LuckyLoans.co.uk are the latest payday lender to announce an extension on existing payment holidays which gives individuals the chance to extend their loan for a further 3 months. This extension could allow individuals to pause their loan repayments for a total of 6 months.

Payment holidays can be extended, but this needs to be discussed and requested well in advance. Evidence needs to be presented to the bank or institution from the requester, proving that making a payment to a loan or mortgage is simply not possible. There will be an investigation into the matter and another conversation of time, where a new timeline will be agreed upon by both parties. In cases such as Covid-19, however, this timeline could change only on the part of the bank or institution and those with loans or mortgages who are unable to make payments will be notified.

While payment holidays are there to support those who are struggling, it is always important to get all information before making the decision to proceed into a payment holiday agreement. In some cases, these payment holidays may affect one’s credit score (as the person is not effectively reducing their debt).

Banks and other such institutions are there to help you with loans for school, houses, rent, cars, etc. They are also there to help you with a mortgage for a house or a business space. Banks and institutions are businesses and they need to make money to remain afloat. Payment holidays are a really great tool if you are aware of all of the moving parts and you have the ability to start paying loan installments again in the future.

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Can I repay a loan early?

Most people in their lives will take out some form of loan at one point. This could be a mortgage to help buy your own home, a loan to buy a car or a payday loan to cover an unforeseen emergency. Loans can be very useful in life to give you extra money when you really need it. Many loans will be for longer periods though and this means you will be paying it off for a while. A big question for many with this in mind is whether you can pay a loan off early. Many people who take a loan out are simply keen to get it paid back as soon as they can which is understandable.

But can you really choose to repay a loan early?

Check the agreement you signed with your direct lender

The very first thing you should do when thinking of repaying any loan earlier than planned is to check your lender’s agreement. When you sign up for a loan with the direct lender in question, you will complete paperwork which sets out all the conditions around it. Before you confirm with them that you want to repay your loan early, check out what the small print in your agreement says.

Some loans you take out, for example, may stipulate that this is simply not possible or put certain conditions on early repayments. A good general tip is to also think about whether you might want to repay early before signing up for your loan. If you know that this might be something you wish to do, you can make sure any deal you sign allows it.

Watch out for early repayment fees and charges

One other key thing to bear in mind when thinking of repaying your loan early is any fees this will bring. Many direct lenders will charge you certain fees for paying what you owe off earlier than planned. This is because they will be losing out on some of the interest you should be paying each month for the whole term of your loan. Early repayment charges can sometimes add up and be quite expensive. In light of this, it is key to know what charges any early repayment might be so you can budget for them. This also means you can avoid financial difficulties if you find that any early repayment fees will be too much to cover.

What are the benefits of repaying a loan early?

As well as the practical side of paying off any loan earlier than originally planned, you should think about if it is really worth it. The great news is that there are some real benefits to paying off any money you have borrowed before the full term is up.

The most obvious is that you will have paid the debt off you owe and no longer have that to worry about. Living debt free is something most people are trying to achieve and it certainly is less stressful. Paying off your loan early also reduces the financial strain on you as you will not have to find the money to make repayments each month. This spare money can then be saved or used to treat yourself.

Most people don’t know this but paying off a loan early is also a good move for your credit score. Not only does it remove debt from your financial records but it also shows that you paid off the loan in full and earlier than planned. All this will help to give your credit score a boost and show that you are a lender who can be trusted by other companies. If you then need another loan in future, it will come in very handy.

Early loan repayment is worth thinking about

As the above shows, repaying a loan early has some fabulous benefits but is also something to consider carefully. It is certainly worth looking at the agreement you signed when taking out the loan and picking up on any early repayment fees. If you do this though and want to access the benefits of repaying your loan early, it is an option worth mulling over. With the money you save, you can then begin to plan again for the future.

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