Applicants for a loan for a certain amount may enjoy a period when they do not need to meet the repayment terms and conditions - monthly instalments, interest or fees.
This does not mean that the financial institution has forgiven or will not charge the repayments when we are not paying. Interest continues to accrue, increasing the final amount of the debt.
Differences between partial and total payment holidays.
When you apply for a loan from a financial institution, you must completely understand the repayment plan: the repayment period, monthly instalments, fees and percentage interest rate for the loan.
There are two forms of payment holidays: partial and total.
- In partial payment holidays, the customer asks if they can only pay the monthly interest on the instalment, without repaying the instalment itself.
- In total payment holidays, customers pay absolutely nothing. They do not pay the monthly instalment, the principal to be repaid to the financial institution or the proportional interest.
In general, the validity or duration period of the payment holiday is requested at the start of the loan. Approval depends on the customer's credit risk, the bank's competitive offering and the length of the payment holiday.
When are payment holidays requested?
Payment holidays, whether total or partial, are usually requested when customers are in difficult situations, such as cash flow emergencies and unemployment.
For companies, payment holidays are often a useful way of taking on the extra costs of a loan when financing a project that has a long-term future with guaranteed profitability.