Payment Holiday

Meaning and Definition

A payment holiday, also known as a payment deferral or repayment holiday, is a temporary break from making regular loan repayments. During a payment holiday, borrowers are not required to make their usual monthly payments for a specified period. However, interest may continue to accrue during this period, and the missed payments are usually added to the outstanding balance or spread over the remaining loan term.

Why it is important to know

Payment holidays can provide borrowers with temporary financial relief in situations of unexpected financial hardship, such as job loss, illness, or other financial difficulties. They offer borrowers the flexibility to pause their loan repayments for a certain period, allowing them to manage their cash flow during challenging times. It is important to note that payment holidays are subject to the lender's terms and conditions and may come with additional interest charges or an extended loan term.

Example in car finance

Let's say a car finance borrower is experiencing financial difficulties due to a temporary loss of income. They may request a payment holiday from their car finance provider for three months. During this period, the borrower is not required to make their monthly car loan payments. However, interest continues to accrue on the outstanding balance. The missed payments can be either added to the end of the loan term or distributed over the remaining payments once the payment holiday ends.