Ombudsman warns people about taking Christmas ‘payment holidays’ on loans

A motorist was tempted to take a payment holiday - but ended up getting a nasty surprise. Photo / Getty Images

Taking a break from paying off your loans over the holidays could end up costing you more in the long run, Financial Ombudsman Susan Taylor says.

She said some people might be tempted to take a payment holiday on loans to help ease financial pressure this Christmas.

But a recent case involving a car loan showed the short-term relief could have a nasty hangover - with added interest.

Taylor said the Financial Services Complaints (FSCL) dispute resolution service heard from a man who borrowed money 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.”

The motorist agreed, but a few months later found out a four-week holiday period on his car loan meant the loan term was extended by eight weeks.

That was twice as long as he had expected, so he complained to FSCL.

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

FSCL found the motorist did not realise the interest kept accumulating, but the lender was entitled to charge interest over the four-week holiday period.

The dispute resolution service suggested the man discontinue his complaint, but Taylor said the case should provide a lesson for other people.

“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,” Taylor added.

She said people should carefully weigh up the pros and cons if offered a similar payment holiday.

“It 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.”