Suspending the repayment of a loan obligation for a certain period allows many borrowers to get out of financial problems without generating serious arrears in the payment of installments. This suspension is called a credit vacation. When and how can you use them?
Credit holidays consist in postponing the repayment of one or several principal and interest installments or only part of the principal installment, which is associated with the need to extend the loan repayment period or increase the amount of installments paid.
A holiday from a loan?
Credit holidays are a specific banking product offered by some banks. They allow the bank to defer the repayment of the principal and interest installment in cash or mortgage on the conditions specified by the bank. Not every bank offers credit holidays to customers, and the conditions for their use may differ from one lending institution to another.
Banks do not automatically grant credit holiday entitlements to their clients, but individually agree whether a given client will be able to take advantage of this option. This is a kind of lifebuoy from the bank for customers who may have temporary problems with timely repayment of principal and interest installments.
What are credit holidays in practice?
The Bank, by granting credit holidays to the client, may decides to suspend the repayment of principal and interest installments or only the capital part of the installment for one or several months. It all depends on the policy of the lending institution.
Credit holidays are intended for customers who have so far reliably repaid their credit obligations. They should only use them in emergency situations when they are at risk of sudden loss of liquidity. Banks grant credit holidays on different terms, and timely repayment is one of the basic onesminimum of the first 12 loan installments. Abuse of credit default interruptions may result in the bank’s refusal to request another loan holiday when the customer actually needs them.
Consequences of using credit holidays
In an emergency, the borrower has no other choice but to ask the bank for credit holidays. However, you have to be aware of the consequences. Holidays are a temporary break in repayment of the loan, but they do not cause that the installment is canceled. Postponement of repayment provided for credit holidays involves the use of one of the following solutions:
- extending the loan period,
- an increase in subsequent installments – installments resulting from credit holidays are added to the installments remaining until the end of the current loan period,
- adding deferred installments to the last installment provided for in the loan agreement.
The bank may also apply individual credit vacation conditions negotiated with the client.
In all cases, the obligatory cost incurred by borrowers when the loan is postponed will be an increase in interest resulting from the extended repayment time of the entire liability or a change in the amount of its subsequent installments.