The Hidden Perils Of Payment Holidays

While loan payment holidays may offer short-term relief for borrowers who are battling financially, the extra interest added to the debt and the time it will take to pay it off might mean it’s just not worth reducing or deferring payments, in the long run.

“We are seeing cases where borrowers don’t understand that deferring payments extends the term of loan, meaning that they will end up paying more interest over the life of the loan,” explains FSCL CEO, Susan Taylor, adding that it is important for borrowers to speak to their lender early if they are experiencing hardship and to make sure they understand the implications of changing the terms of a loan.

“It is important for borrowers to be mindful of the consequences of opting for a “payment holiday”, that is, when you take a break from payments or pay less than what you originally agreed to. You will pay more at the end of the day,” Ms Taylor says.

A case brought to Financial Services Complaints Limited (FSCL) recently shows that once a borrower accepts the terms of a new loan, after making an application for hardship relief, it is not possible to revert to the original loan term.

When Wendy took out a loan in 2019, she had every intention of paying it off within three years. Like many New Zealanders, Wendy experienced financial hardship during the 2020 nationwide Covid-19 lockdown.

When her salary reduced by 50% a year after she took out the loan, Wendy applied for a repayment holiday because she was not going to be able to make her monthly payments.

The lender offered Wendy a 3-month repayment deferral, explaining that her repayments would change once the repayment deferral ended.

Under the new repayment schedule, the term of Wendy’s loan was extended by ten months, and she was charged additional interest. Wendy agreed to the new contract terms.

It was only later that year that Wendy realised that her loan repayment deferral had led to her loan term being extended and extra interest being added to her loan balance.

Unhappy about the additional interest, Wendy asked the lender to let her go back to her original loan balance and term. The lender said the new terms were legally binding and they could not go back to the original agreement.

Wendy complained to FSCL. Although the repayment holiday meant Wendy’s loan term was extended and that Wendy would pay more interest on the loan in total, FSCL could see that Wendy had agreed to the new contract terms.

FSCL could not see any grounds for asking the lender to reinstate the loan to how it had been before the repayment holiday.

FSCL also saw that the lender told Wendy that her loan would still accrue interest whilst the repayment deferral was in place and had recommended that she make any payments she could afford towards the loan during the holiday period.

Ms Taylor explains that a borrower is entitled to request a loan repayment deferral or holiday if they find themselves in financial hardship, and their lender must fairly assess their application, but reiterates that this means interest will continue to be added to the loan. The loan doesn’t simply stop during the deferral period.

“The loan term will be extended because of the loan repayment deferral and will mean the borrower will be paying the loan back for longer than they had originally planned.”

You can find the case note here.

About FSCL

FSCL is an independent not-for-profit external dispute resolution scheme which provides dispute resolution services to participating financial service providers and their clients. The FSCL process focuses on resolving complaints through conciliation and assisted negotiation and is also able to make formal determinations which are binding on financial service providers. The FSCL process is free to consumers. For a list of FSCL’s participants and more information on FSCL visit www.fscl.org.nz . You can learn more about dispute resolution schemes in New Zealand by watching the following video: https://www.youtube.com/watch?v=KPQN_ajedxA

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