Credit holidays can be offered to the borrower if he is not able to fulfill debt obligations under a previously concluded contract. This cannot be called restructuring, since the terms of repayment of the loan remain the same. Here, the loan amount will be partially or in full volume paused. Most bank customers solve temporary financial difficulties in this way, since it is most effective.
1. What is credit holidays in simple words
Credit holidays (Eng. «credit holidays») is a time period established by the bank during which the borrower may not make payments on the loan. At the same time, they do not harm the credit history of the bank’s client. But, credit holidays do not mean that interest for the period of their validity will be written off. They will have to be paid later.
Deferral of payments is provided at the initiative of the borrower. If the problems are really significant, the bank will agree to meet the client. Refusal can be obtained if the request of the debtor is contrary to the law. Also, sometimes the maximum loan amount and the borrower’s current income are taken into account.
Sometimes customers ask the bank for a credit vacation when they know that significant expenses await them ahead, for example, for repairs, travel, treatment, etc. But, financial institutions in such cases ask for a guarantee that through 1 — 2 months, the stable income of the client will be returned to its previous state and payments will continue taking into account previously established interest.
2. What are credit holidays
In the process of granting a deferral of current loan obligations, a penalty or any penalties are not applied.
Credit holidays are a delay in monthly payments for a specific period in which debt obligations to the bank will be retained in full.
Each of the borrowers who has a desire to use this service should be aware that deferral is not a write-off of debt for a particular period or cancellation of payments. The loan will need to be paid in full, including interest. Banks often meet their customers, because otherwise, there is a risk of a complete loan non-refund if the borrower really has significant financial difficulties.
The following credit vacation options exist:
- Deferral in full. Means that the bank’s client is temporarily exempted from making any payments. This means both the body of the loan and interest. But, it is worth considering that for the period of validity of credit holidays interest will also need to be paid, only later. Also, before applying for a credit vacation, the borrower must understand that banks provide a full delay only in exceptional cases, when the borrower really has significant financial difficulties. At the same time, a complete delay for the bank’s client is also not profitable. This is due to the fact that after payments are resumed, a large overpayment will occur;
- Deferral of part of the loan. In this case, it is said about a decrease in the amount of monthly payments. This means that the borrower will need to pay a monthly certain amount, which will be lower than specified in the contract. For example, a bank may agree to a monthly repayment of interest on debt, but the body of the loan will remain the same. Thus, for the period of validity of the credit holidays, the financial institution will continue to receive interest for the funds issued to the borrower as a loan, but for the debtor itself there is a significant minus in, that the principal loan amount will remain the same. When applying for such a delay, it should be borne in mind that it can be applied a maximum of two times. Other conditions may be specified in the loan agreement. After the deferral period is completed, the bank may prolong the loan or increase monthly payments;
- Individual conditions. In rare cases, the lender and borrower can jointly determine the personal payment schedule, taking into account the current financial position of the debtor and the interests of the creditor. Often, it talks about reducing monthly payments on the loan body, which also means reducing interest on the use of the loan. But in the future, the payment period will be increased until the loan is fully repaid.
In each of the cases, credit holidays involve the extension of the loan agreement, but only if the financial institution does not apply an increase in the amount of monthly payments immediately after the deferral period is completed.
3. Vacation Terms
The borrower’s desire to take out a credit vacation is not enough for the bank. Financial institutions meet only if the request for a deferral is supported by significant circumstances, which in turn do not contradict the law. If the borrower simply goes to the bank and asks for no reason to defer payments, this option will not even be considered.
To connect the option, documentary evidence is needed that the client is currently experiencing financial difficulties and without receiving a delay he will not be able to make monthly payments in a timely and full amount.
Each bank has its own list of necessary documents for receiving a deferral. It can be called approximate due to the fact that each of the clients has its own reasons for requesting a deferral.
The reason for providing credit holidays may be natural disasters, damage to property or other circumstances beyond the control of the borrower that triggered financial difficulties. Even if any grounds are absent in the contract, the bank may meet and provide a deferral.
In standard cases, financial institutions request the following documents:
- In standard cases, financial institutions request the following documents:
- certificates from special services. They will be needed in cases where the borrower lost property as a result of a fire or flood;
- documents indicating the upcoming reduction;
- in case of health problems with the borrower or his relatives, recipes for the purchase of expensive drugs with receipts, as well as sick leave, may be needed;
- 2 -NDFL help is needed to track a significant reduction in wages.
In each of the cases, for starters, the borrower must contact the financial institution and talk about the situation. A bank employee will determine the type of assistance that the client can count on and what documents must be provided to arrange for deferred payments or reduce them.
There are a number of specific reasons that can be considered as grounds for providing credit holidays:
- opening a business in other countries;
- health problems;
- temporary departure to another country;
- order to reduce from the current place of work;
- sports competitions.
Each of the reasons will be considered individually and decide whether it is strong enough to provide credit holidays. In this regard, it is recommended to provide any papers confirming a particular situation. This will significantly increase the chances of receiving a deferral or reduction in monthly payments.
4. How to apply for a credit vacation
To use the “credit holidays” service, you must apply for a deferral of the loan. The procedure for obtaining credit holidays may be as follows:
- Contact a banking institution for advice on the possibility of delaying or reducing monthly payments.
- If credit holidays are really possible, you need to prepare an application. To do this, a bank employee issues a special form to fill out.
- At the next stage, documents are prepared confirming that the client will soon really have financial difficulties that do not allow him to repay the debt in a timely manner.
- Waiting for a bank decision.
- When a decision is received, you must come to the bank to discuss the terms of the delay or restructuring.
- The last stage is the signing of a deferral agreement.
Previously, financial institutions could connect the credit vacation service automatically without the personal presence of the client in the bank. But this is possible only in the event of force majeure circumstances. At the moment, the decision to remotely connect the service has been canceled. Therefore, the borrower must be personally present at the bank.
In the process of applying, the client must prepare the following documents:
- Document confirming the identity of a citizen of the Russian Federation;
- Help 2 -NDFL and other documents if the client is the business owner;
- Military ticket (if any);
- Documents that can confirm the difficult current financial situation of the client. It can be a disease or death of a loved one;
- Other documents that a financial institution may request on an individual basis.
If the borrower does not have the opportunity to personally transfer the documents, this can be done by an authorized representative who has the appropriate power of attorney certified by a notary public. This is necessary to confirm the authority of the representative to act on behalf of the bank’s client.
5. Credit holidays for sole proprietors
For individual entrepreneurs, other conditions for obtaining credit holidays apply. For this, income for the last month should be lost in the amount of 30 %, when compared with previous months. In addition, the borrower should be able to confirm this fact with relevant documents.
To do this, a notice of registration on the labor exchange, a certificate of tax inspection, a officially sick leave, etc. is provided. In the bank where the borrower plans to receive a deferral of payments, it is necessary to clarify in advance which documents will be needed for a particular case.
Sometimes, a financial institution can meet and assess the need to provide credit holidays without additional documents and inquiries. For example, this can happen in a situation where the borrower receives a salary on the same exchange where the loan was issued. It is also worth considering that after the application for credit holidays is submitted, it is not necessary to immediately transfer documents, this can be done within 1 — 2 months after the application is submitted.
According to the law, a banking institution can issue a deferral without a certificate of revenue reduction, but this process can be accelerated by providing relevant documents as soon as possible. If the bank finds out that the borrower made errors in the calculations, the granted deferral can be selected, and the missed payments will need to be repaid urgently, including the fines applied.
You should also know that the credit history will be spoiled by information about the delay, which in the future will negatively affect the conditions for providing other loans. If the loan is not repaid at all, other banks will be forced to refuse to provide a loan to such a client.
Therefore, if the borrower has doubts about the grounds for obtaining credit holidays, it is better to contact the creditor and discuss the decision to defer even before filing the application. In order to successfully apply for credit holidays, an individual entrepreneur should not be in a mortgage environment. In addition, the loan cannot exceed the limits provided by the government.
Regarding a consumer loan, it is 300,000 rubles. But it must be borne in mind that the limit is set for the full amount of the loan, not the balance. For example, credit holidays will not be provided if the application is submitted for a deferral of credit in the amount of 500,000 rubles, where the balance is 295,000 rubles. In this case, the limit will be recognized as exceeded.
6. How credit holidays help to cope with financial difficulties
First of all, credit holidays help reduce the financial burden. During their validity, the borrower may not make payments on the loan at all or pay another, more convenient amount. But, the duration of credit holidays can reach the maximum of 6 months. Once they are finished, it will be necessary to return to the previous schedule, and missed payments will be postponed.
Another problem that will help solve credit holidays is the preservation of a clean credit history. This means that during the course of the credit holidays, the missing payments will not be included in the credit history and are regarded as late. Otherwise, the borrower’s credit rating will be violated in the future, he will not be able to take a loan on favorable terms for himself.
If the client wants to pay a smaller amount, but does not issue a deferral, this information will be entered in the credit history and rated it as a delay. Often, difficulties arise with the execution of documents when the bank approves the credit holidays and asks the borrower to provide a certificate, and he, in turn, does not fulfill this requirement and does not comply with the payment schedule.
Therefore, banks always draw the attention of customers to the fact that a request to change the terms of credit agreements must be confirmed by a number of binding documents. If you neglect this rule, the absence of monthly payments will be displayed in the credit history as a delay. In some cases, during the period of credit holidays, the bank may agree to charge interest at a lower rate.
For example, if a borrower issued a loan of 300,000 rubles in cash for 3 years, according to estimates by the Central Bank, the loan rate may be about 17 % per annum. In this case, during the vacation, the bank will accrue 12 % per annum. But, this rule can only apply to card loans, cash and car loans. Speaking of mortgages, interest will be accrued at the rate specified in the contract.
It is recommended that the credit vacation service be used only when it is really necessary and there are no other options for overcoming a difficult situation. The client is interested in returning to the standard payment schedule as early as possible in order to avoid significant financial losses. At the same time, a correctly applied delay is one of the best ways to maintain a clean credit history and solve temporary financial difficulties.