Credit holidays mainly apply to mortgage loans, although people with cash loans can also apply. Only those who have paid their debts on time will benefit from credit holidays.
Credit holidays – what are they?
Credit holidays are an arrangement agreed with the bank (based on a separate document) to skip one (less often several) loan installments. However, this is only a temporary suspension of debt repayment, so it should not be confused with its cancellation.
Detailed conditions for credit holidays are set by the bank where we received the loan. When you apply for a credit vacation also depends on the particular financial institution. Sometimes it is enough to do it a few days before the anticipated problems with repayment, or at least a week in advance.
To be able to take advantage of credit holidays you must submit an appropriate application to the bank. The prepared document should contain information such as:
- our personal data,
- bank details in which we apply for credit holidays,
- description of the commitment that we want to suspend,
- our signature (it must match the one on the credit agreement).
Sometimes the bank may require us to justify the application and additional approvals (e.g. to collect a commission for suspending loan repayment).
On vacation only with the consent of the bank
Even if a bank has a credit holiday in its offer, this does not mean that we can “go” on it arbitrarily (the bank will treat it as a delay in repayment and will draw certain consequences for us, e.g. accruing interest for late payment). Therefore, if we recognize that in our situation credit vacation is a good solution, we must ensure that the formalities related to it.
First of all, we should find out if our credit agreement contains a provision about the possibility of using credit holidays. Secondly, as we have already mentioned, it will be necessary to submit the appropriate application to the bank. Thirdly, after providing all the documents, we will have to wait for the bank’s decision. Only when the financial institution has granted our request will we be released from the need to pay one monthly installment.
Credit holidays in each bank will look slightly different. In one we will have to submit a request for a special print, in another it is enough to “just” present such a request in writing.
The issue of suspending installments also looks different. Here, depending on the specific institution, we will either be able to “rest” from the entire installment, or only from its capital part (it will be added to the next installment, or spread over the remaining installments).
It is also worth paying attention to the time after which we can apply for credit holidays. This is usually possible after paying 6 or 12 (again depending on the bank) installments.
Credit holidays and grace period
Each installment repaid under the loan consists of the principal and interest parts. The grace period will reduce the monthly installment by only the capital part. The interest part will still have to be paid within the time limit provided for in the contract.
Regardless of whether we are talking about a grace period or credit holidays, a liability that we will not settle now will pay us later. Detailed terms of repayment of our debt can be found in the loan (or loan) agreement or the regulations of the institution.
When analyzing the rules on which we can apply for credit holidays, it is worth paying attention to whether they relate to bypassing the entire installment or only part of it. It is also important how we will have to settle the suspended payment at a later date. You should also understand the fees associated with taking credit holidays. In some banks it will be burdened with only a small cost option, in others we will have to pay dearly for this “pleasure”.
Credit holidays are not for everyone
Unfortunately, not everyone can “go” on credit holidays. Banks give this possibility only to those who have paid their installments on time. It is worth keeping this in mind from the first days of the contract, because you never know if you won’t have to use this option. Thus, credit holidays for some may be an additional motivation to pay their debts on time.
It is also worth knowing that we will not receive credit holidays at every bank. Whether a given financial institution offers them depends on its internal policy. Therefore, before we decide to take a loan, we should check whether we can take advantage of credit holidays where we plan to take it.
Are credit holidays worth it? Summary
Credit holidays consist in postponing a month of repayment (in whole or in part) of your liability. Some banks allow you to suspend repayment installments even once every six months, but most limit this option to one or two times during the entire loan period. Therefore, it is good to think about it when we take advantage of credit holidays and choose a moment of “rest from credit” in which it is really necessary for us (and our budget).
Although credit holidays can be helpful when you are struggling with financial problems, be aware that this is not a free lifebuoy. Information about the costs of credit holidays can be found either in the loan agreement or in the table of fees and commissions of a particular bank.
As a rule, the cost of credit holidays depends primarily on the current interest rate on the loan and on (though to a lesser extent) how many installments we still have to pay. Subsequent repayment of the temporarily suspended installment takes place either by increasing the amount of subsequent installments or by extending the loan period. An overdue installment can also be added to the last installment at the end of the loan period.
Let us remember that credit holidays will not help us solve long-term financial problems.