Quick overview

A loan payment holiday pauses regular loan payments for a set period so borrowers can stabilize cash flow during unexpected hardship. Lenders may call these “payment holidays,” “payment deferrals,” or “temporary forbearance,” and rules differ by loan type (mortgage, personal, auto, business, and student loans).

In my 15 years advising clients, I’ve seen payment holidays prevent defaults and buy time for recovery — but they’re not free. The borrower should always confirm in writing whether interest continues to accrue, whether missed payments are added to the end of the term (deferred) or capitalized into the principal, and whether the servicer will report the arrangement to credit bureaus.

Sources: Consumer Financial Protection Bureau (CFPB) guidance on forbearance and the NCUA’s consumer guidance during financial crises. (See links in the Sources section.)

Why payment holidays became common

Payment holidays became widely used during the COVID-19 pandemic and other economic shocks as lenders offered temporary relief to reduce delinquencies and housing instability. Programs vary: some are lender-specific hardship offerings, others are structured industry-wide responses during declared emergencies. The key difference between a hardship program and a contractual modification is that holidays are temporary and usually intended to be short-term fixes rather than permanent changes to loan terms.

Note: federal emergency programs (for example, temporary student-loan pauses earlier in the pandemic) were time-limited and administratively created; those national pauses are separate from privately administered payment holidays offered by banks, credit unions and mortgage servicers.

How payment holidays typically work (step-by-step)

  1. Notification: Contact your lender or servicer as soon as you anticipate missed payments. Early outreach improves options and outcomes.

  2. Application or hardship form: Many lenders require a short application and documentation of the hardship (e.g., layoff letter, medical bills, reduced revenue for businesses).

  3. Review and approval: The lender evaluates the request based on their internal rules and your account history. Borrowers who were current before the hardship usually have a higher approval chance.

  4. Written agreement: If approved, obtain a written agreement that explains exactly how the holiday affects interest, principal, repayment timing, fees, and reporting to credit agencies.

  5. Repayment after holiday: After the holiday ends, you resume payments. Lenders usually handle missed payments in one of three ways:

  • Add missed payments to the end of the loan term (deferment).
  • Capitalize unpaid interest (add accrued interest to principal, increasing monthly payments after the holiday).
  • Require a catch-up plan or modified payment schedule (e.g., split missed payments across remaining months).

Always ask for an updated amortization schedule showing long-term effects.

Common eligibility criteria

Eligibility varies by lender and loan product, but these elements are commonly considered:

  • Evidence of financial hardship (job loss, reduced hours, medical emergency, natural disaster, decline in business revenue).
  • Account standing before the hardship (borrowers who were current or recently current are likelier to qualify).
  • Type of loan (mortgages and some personal loans often have more formal hardship programs; business loans and auto loans depend on lender risk policies).
  • Relationship and documentation — borrowers with a strong account history or who can document the hardship neatly tend to get faster, better terms.

What changes to your loan should you expect?

  • Interest: In most cases interest continues to accrue during the holiday. That means your total cost of credit rises unless the lender explicitly waives interest (rare).

  • Balance and amortization: If interest accrues and is then capitalized, your loan principal grows. Alternatively, missed payments may be tacked onto the end of your loan term — which preserves your monthly payment but extends the loan.

  • Credit reporting: A properly documented and agreed-upon payment holiday generally should not be reported as a delinquency. However, the lender might note the account as “payment deferred” or “forbearance,” which can be viewed by future lenders as a sign of prior stress. Check CFPB guidance and ask the servicer how they will report the arrangement to the credit bureaus.

  • Fees and penalties: Confirm whether the relief carries administration fees or triggers higher rates later; get all terms in writing.

Simple math example

Imagine a $20,000 personal loan at 8% APR with a 5-year term and monthly payments of roughly $405. If you take a 3-month payment holiday and interest continues to accrue:

  • Monthly interest on $20,000 at 8% = about $133.
  • Over three months = $399 in accrued interest.
  • If the lender capitalizes that $399, your new principal becomes $20,399 and your monthly payment will rise slightly or your term will extend depending on the lender’s method.

If instead the lender tacks three payments onto the end of the loan, your monthly payment stays close to $405, but you pay interest on the larger outstanding balance during those three months and you finish three months later.

Ask the servicer for an updated payoff figure and amortization schedule showing both outcomes.

Practical steps to request a payment holiday

  1. Contact the servicer early. Use the phone to start but follow up with an email or secure message so you have a written record.
  2. Prepare documentation (layoff notice, doctor’s note, profit-and-loss for businesses, bank statements).
  3. Ask these specific questions before you agree:
  • Will interest continue to accrue? Will it be capitalized?
  • How will missed payments be repaid or scheduled? Will the term be extended?
  • Will there be fees or a formal modification on my note?
  • Will you report this arrangement to the credit bureaus, and if so, how?
  1. Get the approval in writing and request an updated amortization schedule.

Alternatives to a payment holiday

Common mistakes to avoid

  • Waiting too long to contact the lender. Early communication preserves options.
  • Accepting verbal promises. Always get written confirmation of the terms.
  • Overlooking the long-term cost. Many borrowers focus on immediate relief and underestimate how accrued interest or capitalization changes the total cost.
  • Forgetting to check credit reporting practices.

Frequently asked questions

Q: Will a payment holiday hurt my credit score?

A: If the lender agrees to a documented payment holiday, it typically should not be reported as a late payment. However, the label “forbearance” or “deferred” can appear on your credit file. Confirm reporting practices with the servicer and keep written proof of the agreement. (See CFPB resources at consumerfinance.gov.)

Q: Can I request more than one payment holiday?

A: Some lenders allow multiple short-term holidays; others limit relief to a single period or require re-evaluation. Repeated requests may result in stricter terms or a modification offer instead.

Q: Does interest keep accruing during the holiday?

A: In most private loans, yes. Public emergency relief programs are the exception when the government authorizes interest breaks.

What to do after the holiday ends

  • Confirm your next payment date and amount in writing.
  • Review your updated amortization schedule.
  • Build a plan to address higher payments if interest was capitalized (budget cuts, refinancing, or a loan modification).
  • Monitor your credit reports for correct reporting of the arrangement.

Professional takeaway

A payment holiday can be a useful short-term tool to avoid missed payments and stabilize cash flow. In my practice, borrowers who get clear written terms and review the updated amortization schedule avoid surprises later. When used carefully and combined with a recovery plan (budgeting, job search, revenue rebuilding), a payment holiday often prevents deeper financial damage.

Sources and further reading

Professional disclaimer: This article is educational and does not constitute personalized financial or legal advice. Consult your loan servicer or a qualified financial advisor or attorney for guidance tailored to your circumstances.