If you've been comparing personal loan deals recently you're bound to have noticed a very popular option that's becoming increasingly common, namely repayment holidays. This feature allows you to take a break from making repayments, and can be a very useful option in a variety of situations. But what exactly is a repayment holiday, and are there any drawbacks? Many loans with a payment holiday facility let you delay making the repayments for a specific number of months immediately after receiving the funds paid out, while others are more flexible and allow you to take the breaks as and when you want to, although the number of breaks in any one year is of course limited. In what situations are repayment holidays useful? When the payment break is at the start of the loan, it can really help the process of debt consolidation by giving you time to get all your finances in order before having to commence your repayments. Without an initial break, you run the risk of not paying off your debts in time to avoid final payments, and yet still having to make a first repayment on your new loan - all in the same month.
This would obviously be difficult to afford for almost anybody. The more flexible type of payment holiday facility is useful perhaps for people whose income is seasonal or irregular, and so in months when money is short you can ease the pressure by opting to skip a payment. Alternatively, a payment can be missed at times of the year when other expenses are high, for example during the festive season, or in summer at holiday time. So far, this seems like a great option to have on your loan, but of course, there will be a price to pay.
You might well find that these loans are more expensive in terms of interest rates charged, but if you shop around and compare loan offers carefully you can get some great deals, with payment holiday loans sometimes even boasting cheaper rates than normal ones. A more serious drawback is that every time you skip a payment, you'll still be charged interest for that month, which will be added on to the amount you owe and will itself attract interest. This will increase both the overall cost of your loan, and the time it takes to repay it. And of course, you still need to make up for the missed payment at some point in the future, and so you won't finish payments on your loan on the date originally specified on your loan agreement. Any extension to the repayment term of a loan will naturally mean that more interest is charged overall, and if you make heavy use of the facility then you may find that the loan becomes significantly more expensive than you first thought. With that warning in mind, it's still worthwhile checking to see if you can find a loan with a repayment break facility at an APR that isn't too uncompetitive in comparison to ordinary loans, especially if you're looking to tidy up a messy financial situation, or you think you might be grateful for the opportunity to skip a payment on your debt every now and then, so long as the facility isn't overused.
Michael writes for Loan Vision, a personal loans comparison and information site, where you can read more about payment holiday loans and other financial topics.