Quick overview

A payment holiday (also called forbearance or payment deferral in some contracts) pauses required loan payments for a set period. It can provide short-term relief, but it is not free: interest usually keeps accruing, lenders may capitalize unpaid interest or extend the loan term, and how the account is reported to credit bureaus determines immediate credit-score impact.

How payment holidays typically affect loan interest

  • Interest accrual continues: Most lenders continue to charge interest during a payment holiday. That extra interest will either be added to your principal (capitalized) or recovered through higher future payments or a longer term.
  • Capitalization increases cost: If unpaid interest is added to the balance when the holiday ends, you pay interest on that interest going forward, increasing total cost.
  • Re-aged amortization or re-amortization: Lenders may re-amortize the loan (spread the remaining balance over the remaining or extended term) rather than require a lump-sum payoff, which changes monthly payments. See how re-amortization compares to refinancing for details: How Loan Re-amortization Differs From Refinancing.

How payment holidays typically affect your credit score and reporting

  • Reporting depends on written agreement: If you have a documented payment-holiday agreement, some lenders will report the account as current or in an agreed-upon status; others may pause reporting. If the lender simply skips your payment without an agreement, late reporting (30+ days delinquent) can appear on your credit report.
  • Short-term vs long-term score effects: A properly documented, temporary deferral often has minimal immediate impact. However, if missed payments are reported or your debt-to-income picture worsens, lenders and future underwriters may view you as higher risk.
  • Indirect effects: Increased loan balances or longer terms can raise utilization or monthly-debt ratios used by underwriters, which can influence credit-based pricing on new loans.

Real-world example (illustrative)

  • Scenario: $10,000 personal loan at 6% APR, fixed payments for 5 years. If you take a 3-month payment holiday and interest continues to accrue: roughly an extra $150 in interest accrues during the break (6% / 12 × $10,000 × 3). Depending on whether interest is capitalized or term extended, your total cost and monthly payments will increase accordingly.

Who typically qualifies and what lenders consider

  • Common candidates: borrowers with temporary hardship (job loss, medical emergency, short-term income disruption).
  • Lender policy matters: Eligibility, maximum length, and whether interest accrues vary by lender and loan type (mortgage, auto, personal, student, credit card).
  • Government programs differ: Federal student-loan and mortgage relief programs have their own rules. Always confirm with your servicer and check guidance from authoritative sources like the Consumer Financial Protection Bureau (CFPB) (https://www.consumerfinance.gov/).

What to ask your lender before you agree

  1. Will interest continue to accrue and will it be capitalized? Get a clear yes/no and a numeric example.
  2. How will you be reported to credit bureaus during the holiday? Request the exact reporting code or policy in writing.
  3. Will the loan term or monthly payment change afterward? Ask for a revised repayment schedule.
  4. Can you get the agreement in writing and a point of contact? Written confirmation prevents surprises.

Alternatives to payment holidays

Practical tips from practice

In my experience working with borrowers, the most common mistakes are accepting verbal assurances, not asking whether interest will be capitalized, and failing to confirm how the account will be reported. Always get the agreement in writing, run the numbers to compare total cost, and explore less-expensive temporary options first.

Bottom line

Payment holidays can be a helpful short-term tool, but they usually increase total interest costs and carry credit-reporting risks if not documented properly. Before accepting one, get clear, written terms about interest accrual, capitalization, repayment schedule, and credit reporting.

Sources and further reading

Disclaimer

This article is educational and not individualized financial advice. For decisions tied to your loans, consult your loan servicer and a qualified financial advisor or housing counselor.