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A payment holiday is an agreement between a lender and the borrower that allows the latter to defer a due payment until a later date. They have always been a feature of certain loans and mortgages, but they became more widely used as a result of the pandemic.
Since March 2020, lenders have been encouraged by the Financial Conduct Authority (FCA) to provide more payment holidays for people struggling to make their monthly payments. Usually they would only be allowed with certain deals agreed in advance as part of the terms and conditions of a loan, but a change in government policy for one year made it easier to deal with the financial burden of the Covid-19 crisis. It was also agreed that the Covid-era payment holidays should not affect anyone’s credit score in the same way pre-Covid payment holidays did.
The Covid-related change of policy ended in March 2021, but some loans and mortgages do still have payment holiday options included.
How to apply for a payment holiday
Now that the deadline for Covid-era payments holidays has passed, you can only apply for a payment holiday if your original loan agreement makes a provision for it. Even then, it is only an application and the lender has the right to refuse.
To apply, you will need to check the details of your loan agreement to see if there is a provision for a payment holiday and then contact your lender. If there is such a provision, or they are willing to consider offering you one, then the next step is to understand exactly how the lender will frame it. This means asking how your lender will arrange the repayments once the payment holiday ends, as they can increase the monthly amounts you must pay or increase the overall amount due.
You must then weigh the advantages of the short-term payment holiday against the disadvantages of the increased cost in the long term.
Payment holiday conditions
There are certain circumstances that will result in the refusal of a payment holiday application, even if your loan agreement specifically states there is a provision for one. These include:
A monthly loan payment missed during a recent period (6 to 12 months)
Your bank account is in arrears
You cannot prove you can afford the monthly payments in the future
You cannot prove you are receiving earned income
You are in a debt management plan
Remember too that if you have previously been made bankrupt, or are currently subject to an Individual Voluntary Arrangement, then your payment holiday application is also likely to be refused.
Alternatives to payment holidays
Even if you are not eligible for a payment holiday, there are often options available to you that work in a similar way, such as deferrals and grace periods. You can talk to your lender to discuss your options, but bear in mind that the same circumstances that automatically deny a payment holiday as described above will remain the case for any alternative.
The alternative options for mortgage holders could include pausing payments for an agreed period, or reducing the amount that you have to pay each month. There may also be the possibility of changing the terms of your mortgage agreement entirely. The payment pause or payment reduction might also be possible for credit card payments and other non-mortgage loans.
However, remember that you will end up paying more in the long term, and such options can also negatively affect your credit score. Always understand exactly how the repayment structure works and what effect it will have on your credit score before finalising the payment holiday alternative.
We Can Help
If you’re interested in finding out more about a payment holiday or payment holiday extension, or any other aspect of your business finances, then get in touch with our financial experts. Find out how GoCardless can help you with ad hoc payments or recurring payments.