In trying to cope with the difficult times, you might have considered deferring your debt payments to a later period. Yes, this will give you some breathing space, but are payment holidays really to your benefit?
Payment holidays allow you to take a break from your repayments for a certain period – usually one to three months. As soon as that period is over, you’ll have to resume paying what you owe. By that time, not only will you pay more on interest, but your repayment period will be longer.
The term will not only be extended by the number of months you’ve missed, but your debt will be determined by how much interest and administration costs you’ve incurred as a result of the payment holiday. This is of great importance if you have long-term debt like a bond. Do you want to have debt that lingers longer than necessary?
In the long-run, you’ll be left with more problems than you initially had. You might even be forced to increase your monthly instalments because you want to mitigate the effects of the extended term on your loan.
Your credit score might also drop in the process because of the debt burden that is brought on by the deferred payments.
Another noteworthy point about payment holidays is that they’re available to good customers. If you’ve been missing payments you will not be eligible for payment holidays.
What you can do instead
If your debt is in the final stages, think about paying the interest only. This is to make sure that your debt doesn’t grow because when you miss your payments, your debt accumulates compounding interest. That means the interest you didn’t pay the previous month will accumulate interest in the current month.
If you’re struggling with your debt, debt counselling is your best bet. With debt counselling, you’ll pay reduced instalments, giving you a chance to breathe while you’re trying to get back on your feet. Just make sure you apply before your creditors take action against you.
The debt counsellor will assess the level of your indebtedness, and if you’re deemed overindebted, you’ll be approved to undergo debt counselling.
How long you stay under debt counselling depends on the amount of you debt you have. Usually the process takes about three to five years – and in some isolated cases, six years. Throughout these years, you’ll pay the amount you’re comfortable with and you’ll have no creditors hounding you.
When you complete the debt counselling process, you’ll receive a Clearance Certificate that proves that all your debt that was under the debt counselling contract has been paid off.
Not only that, but you’ll come out with better money management skills and the opportunity to repair an unfavourable credit score.