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Once you pass the holiday part – a payment holiday isn’t all that great
A payment holiday sounds so ‘attractive’. After all – who doesn’t like a holiday…
But here’s the thing – just like a holiday a payment holiday is not FREE.
I’ve seen a lot of people believe banks are allowing them to skip three payments on a loan, and then they will later just pick up where they left things.
That’s not true.
You see, the bank says you don’t have to pay them for three months. But the interest on your balance is still charged interest. At the end of the ‘holiday’ you’ll be deeper in debt and will either have to take longer to repay the bank, or repay them more each month.
So, let’s say you bought a R350,000 car and you planned to repay it in 54 months. At 9% interest you have to repay R7,739.35 per month.
At the 12 month point you owe the bank R289,677.
Now you ask for a three-month payment holiday.
When you hit month 15 you owe the bank R296,244.
It will take you an additional month to now be able to repay the loan.
If you do the same as this, on your R1.2 million home loan a three month payment holiday could add R26,737 to your home loan balance…
So, a three month payment holiday could add R33,304 extra debt to your name.
Don’t take a payment holiday unless you REALLY have to
If you can in any way afford not to – try to skip that payment holiday. If you can pay off instalments during this time it will continue reducing your loan balances instead of further indebting you.
But if you simply don’t have the cash – then it’s understandable that opting for the payment holiday is your get-out-of-jail-free card. If you have more expensive credit card debt, it might also be useful to take a payment holiday on a home loan or car and rather pay off the credit card debt with the freed up cash.
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Are there alternatives to a payment holiday?
So what are the alternatives to taking a payment holiday?
Well, instead of stopping payments all together you can opt to only pay the interest portion on your loan.
That way your debt doesn’t grow – and you have a little extra leeway in your budget.
Alternatively, if you do take a payment break (especially on your longer term home loan) rather request that your payment term remains the same, so that after the payment break you pay a couple hundred rand more, and save yourself tens of thousands in future interest.
Here’s to unleashing real value,
Editor, Red Hot Penny Shares
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