Should you take a payment holiday during Covid-19?
While it sounds like a lifeline to many, a payment holiday usually isn’t as simple as it may seem. South Africa’s four big banks have offered this option to their customers, many of whom are likely experiencing financial strain in the midst of the Covid-19 pandemic.
In a nutshell, a ‘holiday’ means a break from debt repayments for a set period. It’s an extraordinary measure reserved for exceptional circumstances. Before considering the offer, one must consider the long-term repercussions for your money.
Madri Jacobs, a Certified Financial Planner at Brilliance Bluestar at Sanlam, suggests not taking the payment holiday option unless you really need to, as you’ll end up paying interest on your deferred instalments, “If you do have to take this option, make sure you know the exact terms and conditions upfront. Be very realistic about how your future budget will be affected.” She adds that taking up an offer on a payment holiday just because it's available when you can afford to make repayments, is not ideal. Below are some steps to take to help weigh up whether a payment holiday is right for you and your future finances:
1. Review your budget: Keep evaluating every income and expense item as things are likely to change continuously over the coming months. Tighten up expenditure wherever you can. Make sure you know exactly what your financial position and obligations are in order to pay your bills.
2. Talk to your partner: If you are married or in a relationship and have shared financial responsibilities, discuss your finances and how you plan to continue to pay your bills.
3. Review your bank account statement: Make sure that you still need every item for which a payment goes off your account. For example, do you have the best data contract deal? Are there any subscriptions you can cancel?
4. Audit lockdown expenses: Check whether there are expenses that you can reduce over the short term, such as your grocery bill.
5. Contact your providers: Contact your bank, insurance company or other financial institution if you are unable to pay your premiums or instalments. Check with them whether there are ways of assisting you during this time, aside from a payment holiday. Many providers do offer assistance during this time.
6. Be very pragmatic. Are there things you can afford to cut now in order to keep prioritising your debt repayments? If you must take a payment holiday, how will you need to adjust your budget to cope in the aftermath?
Your financial adviser can help you make these decisions. Once you have taken these steps, you will have a better idea in terms of whether or not you can afford to continue paying your financial obligations or if you should take the payment holiday offered to you.
Jacobs reiterates that if a holiday seems like your best option, chat to your financial adviser and make sure you understand all the fine print. This arrangement could extend your payable term and make your debt more expensive. There could be big ramifications for your finances down the line, so you need to be prepared.”