As we head into the festive season, many people may be tempted to take up a ‘payment holiday’ on loans to help ease financial pressure. However, Financial Ombudsman, Susan Taylor, is reminding consumers they might just end up paying more in the long run.

“While payment holidays may offer short-term relief, the interest added to the loan during the holiday period and the longer time it will take to pay it off might mean it’s just not worth reducing or deferring payments, in the longer term, explains Ms Taylor.

In a recent case investigated by Financial Services Complaints Limited (FSCL), a free Ombudsman and dispute resolution service, Leo* had taken out a loan to buy a car. A few months later, he received a text message from his lender saying that, because he was a loyal client and had no arrears on his account, he was eligible for a payment holiday period over the festive season.

As it was Leo’s first year of paying his loan, buying Christmas presents, and planning a week away with his family, after making enquires, he made an application which was approved.

A few months later, he was surprised to learn that his four-week holiday period on his car loan resulted in his loan term being extended by eight weeks, not the four weeks he had been expecting. Leo complained to FSCL, after being unable to resolve it with the lender.

Leo said that, when he applied for the loan holiday, he was under the impression that a four-week holiday period meant a four-week loan term extension. Leo said he understood the lender’s explanation, that he would not be liable for arrear fees, to mean that he would also not have to pay any interest over the four weeks.

The lender said that, although they did not charge arrear fees over the holiday period, interest kept accumulating, which resulted in the loan term being extended by eight weeks in total.

FSCL found that while Leo did not realise the interest kept accumulating, the lender was entitled to charge interest over the four-week holiday period. We suggested that Leo discontinue his complaint.

“Interest will continue to accrue while a repayment holiday is in place, so the borrower will wind up paying more money back to the lender in total. Typically, the loan term will be extended because of the loan repayment holiday, meaning the borrower will be paying the loan back for longer than they had originally planned,” says Ms Taylor

“Although tempting, consumers might want to weigh up the disadvantages, as while the term ‘payment holiday’ is often used, it is not really a holiday -rather it is a loan deferral that you’ll end up paying for. It is also important for consumers to speak to their lender early if they are experiencing hardship.”

You can read the full case note here.

If something has gone wrong with a financial service provider, people can make a complaint to FSCL at www.fscl.org.nz, by calling 0800 347 257, or emailing complaints@fscl.org.nz

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