Do You Know the Difference Between a Payment Holiday and Credit Insurance?

Whilst the country is in lockdown, many businesses are not able to operate, which will mean that we are also uncertain about our next paycheck.  So what options do you have available if you are not able to pay your bills? There are two lifelines available that are worth a closer look at, those options being credit insurance and payment holidays that are aimed at protecting your credit health. 

Before you make any decisions on your finances, you will need to understand your own financial situation. 

Claiming against your credit insurance and a payment holiday are options for those that are struggling to repay their loan instalments. 

Let’s take a closer look at these options. 

What is Credit Insurance?

Under specific circumstance, credit insurance will cover the outstanding debt on your accounts. Most lenders will insist that you have this type of insurance on your accounts. 

Credit life insurance traditionally was sold with loans to cover disability, retrenchment and death, however, an amendment was made to the National Credit Act in 2017, which extended credit life cover to losing income whilst being employed. This then covers being forced to take unpaid leave, which has occurred recently to many people due to the Covid-19 virus. 

Your claim will be valid when:

  1. You are permanently employed but due to the lockdown, you are not getting a salary as your company is not operating or because you were forced to take unpaid leave by your employer. 
  2. You are permanently employed but are not able to earn an income because you are not able to travel to meetings and engagements. 

You will not have a claim when:

  1. You still earn an income even though it has been reduced because of Covid-19. If this is the case, then it’s best to speak with your credit provider about reducing your repayment or taking a payment holiday.  Keep in mind though that both these options will result in more expensive debt as you will need to pay interest over a longer period. 
  2. You are self-employed or a contractor. 

What is a Payment Holiday?

A payment holiday, on the other hand, is where your credit provider or your bank agrees to you stopping payment on your loan instalments for a specific period of time, which is generally three months. You then take a holiday from your payments, so that you can use the money to meet other obligations. 

You should take a payment holiday when:

  1. You do not have a credit insurance claim
  2. The issue with your cash flow is temporary. For instance, when your business reopens you will be able to meet your commitments once again. You will know what your financial situation is when you look at your budget and your expenses. 
  3. You are not able to afford your instalments in the next couple of months.
  4. You understand the terms and conditions and are sure your debt burden will not be increased by taking a payment holiday. 
  5. Your credit health will be protected by taking a payment holiday.

You shouldn’t take a payment holiday when:

  1. You have too much debt in the first place. If you are carrying too much debt then a payment holiday can make your situation worse as the interest will carry on accumulating, so your debt will become more expensive. If too much debt is your problem, then rather seek debt counselling. 
  2. You can make your payments still, but you are worried about the next month. The best advice here is to keep paying for as long as you can. 

Before you opt for a payment holiday, you need to check the conditions of your credit insurance policy. If you are covered for loss of income, then rather claim on the policy instead of taking a payment holiday. 

We are living in tricky times and we are not sure what is ahead of us, but what you should be doing is paying closer attention to your money how to manage it. You need to track all your expenses, save where you can and put money away for emergencies. 

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