Many personal loans offer a benefit known as a payment holiday. This is where the borrower can take a break from making repayments on a loan for a set period. This is designed to help the borrowers through particularly expensive periods such as Christmas or holidays. These payment holidays are often used as a major selling point for a personal loan. The holiday period is then added to the end of the term, so for example if the loan was taking over three years, with 36 repayments, and a 3 month payment holiday was taken in the middle then the term becomes three years and 3 months, but still with 36 repayments. While the payment holiday is being taken, interest is still charged on the outstanding balance. This interest is then repaid over the remaining term. This means that future repayments will be slightly higher.
There are typically tight restrictions on payment holidays and the borrower will usually have to qualify for the benefit by making a number of consecutive repayments. Once the requirements have been made the borrower can then apply for the payment holiday. It is important to realise that the payment holiday must be applied for and cannot just be taken. Otherwise the lender will consider the non-payment as a default and the borrower will be charged accordingly.
As we mentioned previously the repayment holiday does incur extra interest so it is worth looking at alternatives. In effect the repayment holiday is a loan for the interest charged on the outstanding balance over the remaining term. It may be possible to solve the cash flow problems using 0% credit cards.
Payment holidays do have their place, but it is important to realise that there is a price. It is a good idea to take a cynical view of anything offered by banks or lenders as there is invariably some benefit to them.