Living with credit can be risky. Unforeseen circumstances can make the monthly installment become too much for the household budget. However, in such situations, banks offer numerous assistance tools.
What is a loan extension? On what principles can you take advantage of credit holidays and a grace period? We explain the mode of action and evaluate individual solutions.
Credit deferment – how to do it?
For people who find themselves in a difficult financial situation and cannot timely pay their debts related to loans or loans, banks provide several solutions. These are usually: extension, loan grace or credit holidays. The customer who uses these financial tools gains time to regain financial liquidity. Each of them allows you to temporarily postpone the loan installment. The principle of operation is similar, although there are slight differences between them. Let’s take a look at them in turn.
Credit Prolongate is the most general term. Refers to two types of changes in the form of loan repayment.
Extends as an extension of the repayment period
In this situation, the number of loan installments is increased, but their amount decreases. We pay less money every month, although we will eventually do it for a longer period. This beneficial solution for people who overestimated their financial capabilities and the amount of the monthly installment is too much of a burden on their home budget.
Extends as a suspension of installment
Suspension of the loan installment means that for some time we can resign from paying debts to the bank. However, this break means additional costs. The extended loan repayment period will cause more interest on the borrowed capital. Prolongates in the form of suspension of installments can be made in two forms: credit holidays and loan grace.
Credit holidays are deferring the repayment of principal and interest in a loan or a loan in its entirety. This means that after submitting the application to the bank and its positive consideration, we do not have to pay back a single dollar for the designated period.
Depending on the individual conditions and financial policy of the bank, credit holidays can last from 1 to even 12 months. People who regularly pay their debts (at least 12 installments) and have a good reason for postponing have better chances for this type of loan extension. How often we can apply for a credit vacation depends on the bank’s decision. Sometimes we have the right to do it once a year, but in most cases this option only exists once throughout the entire debt repayment period. The form of the loan taken is usually decisive. In the case of extended mortgages, we can expect more opportunities to apply for a credit vacation. This option may not be available for short-term cash loans.
Credit grace period
The loan grace period also consists in postponing the loan installment repayment, but only in the capital part. This means that we still have to pay interest every month. We only suspend the repayment of the proper part of the loan – funds that we borrowed for direct use.
The rules applicable to servicing the grace period and loan holidays are similar. It should be noted, however, that obtaining a grace period should be easier for most banks than obtaining permission for a credit vacation. In this case, the bank agrees to postpone only part of the installment, so such a decision is subject to a lower risk.
Credit grace period is not always a profitable solution. In fact, it brings relief to the borrower in two situations:
- after exceeding half of the loan period – at the beginning of the loan repayment period, the lion’s share of each installment is interest. Only when we pay the appropriate part of the interest does the grace period become profitable. The closer the loan repayment is to end, the larger the capital portion of the monthly installment;
in a situation where we repay a loan with decreasing installments – the way the loan installments are spread means that interest settlement takes place earlier.
When can we apply for a loan extension?
Each extension of the loan should result from the crisis. It is worth remembering that the possibility of postponing or restructuring the loan depends only on the bank. This is not an option for every customer and not every bank has it in its offer. Situations in which we can most often apply for a credit vacation are:
- sudden problems with financial liquidity – eg as a result of job loss,
- difficult health situation,
- the appearance of a child,
- the need for larger purchases.
Credit Prolongate – how much does it cost?
The benefits that the borrower can obtain from the loan extension seem clear. After the break, however, it is time to pay the outstanding installments. Additional costs we incur may include:
- interest for extended loan repayment period,
- a fee for granting a loan extension, which the bank may charge.
The new loan price will be indirectly dependent on the form in which we repay the remaining receivables:
- installments in the same amount – extended repayment period;
- the same repayment period – installments correspondingly higher;
- additional installment at the end of the repayment period – we pay the arrears once.
When deciding to choose one of the options to repay a deferred loan, it is worth thinking about whether this will not involve burdens that again exceed the capabilities of our budget.
Credit deferral – pros and cons
The advantages of loan renewal should be:
- restoration of financial liquidity,
- protection during temporary life difficulties.
The list of disadvantages of credit holidays is longer:
- the need to incur additional costs,
- difficulty in obtaining a prolongation – high requirements of banks,
- higher household budget charge possible after the end of the credit vacation period,
- extended loan repayment time.
It is worth remembering that some of the disadvantages of loan extension can be treated simply as the cost of assistance that the bank provides in a crisis. Extending the debt repayment period can be uncomfortable and limits our room for maneuver when it comes to other financial activities. However, if the extension allows us to avoid arrears to the bank and go straight, its choice may be the most sensible solution.