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What is the difference between a payment holiday and credit insurance?

Many of us are uncertain about our next pay cheque, given that many businesses cannot operate while the country is in lockdown. What are your options if you can’t pay all your bills? Payment holidays and credit insurance are two lifelines worth investigating to protect your credit health. Let’s find out more.

There are a lot of financial tips and debt advice out there at the moment. Your job is to understand what the different options are, and to understand your own financial situation, before you make a decision and take action.

A payment holiday and claiming against your credit insurance are both options for people struggling to repay their loan instalments. Implement these tips to decide which way to go.

What is credit insurance?

Credit insurance covers the outstanding debt on your accounts under specific circumstances. Most lenders insist that you have this insurance on your accounts.

Traditionally, credit life insurance sold with loans covered only retrenchment, disability and death. However, an amendment to the National Credit Act in August 2017, extended credit life cover to losing income while remaining employed, including being forced to take unpaid leave, which has happened to so many people as a result of Covid-19.

You should have a valid claim when:

• You are permanently employed but not getting a salary during the lockdown because your company is not operating, or because your employer forced you to take unpaid leave.
• You are permanently employed but cannot travel to meetings and engagements and, as a result, cannot earn an income.

You don’t have a claim when:

• You still earn an income, even though your salary has been reduced due to Covid-19. In this case, talk to your credit provider about decreasing your repayments or taking a payment holiday. Remember, however, that both these options will result in more expensive debt as you will pay interest over a longer period.
• You are a contractor or are self-employed.

What is a payment holiday?

A payment holiday is when your bank or other credit provider agrees that you can stop paying your loan instalments for a specific period, usually three months. You literally take a holiday from your payments that allows you to use the money to meet other obligations.

Take it when:

• You don’t have a credit insurance claim.
• Your cash flow issue is temporary. For example, as soon as the factory, restaurant or hotel where you work reopens, you will be able to meet your commitments fully. You will know what your situation is by looking at your budget and your expense tracking.
• You really cannot afford your instalments in the next month or two.
• You fully understand the terms and conditions, and are sure that the payment holiday will not increase your debt burden.
• The payment holiday will protect your credit health.

Don’t take it when:

• You have too much debt in any event. A payment holiday will only make matters worse because the interest keeps accumulating, which means your debt becomes more expensive. If too much debt is your problem, rather go for debt counselling.
• You can still make your payments, but you are worried about next month. The best debt advice is to keep paying for as long as you can.

Before you apply for a payment holiday, check the conditions of your credit insurance policy. If you are covered for loss of income, claim against the policy instead of taking a payment holiday. It is by far the best debt advice you can follow.

These are tricky times and we don’t know what to expect. But what you can and should do, is pay even closer attention to managing your money. Track all your expenses, save where you can and put money away for emergencies. This will keep you out of financial trouble and protect your credit health.

For more information on personal loans, visit https://www.bayportsa.com/products-services/personal-loans-online/

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