A payment holiday is a formal agreement between a borrower and lender to temporarily stop loan payments for a specific period, usually ranging from a few months up to six months. It’s designed for situations when financial hardship, such as job loss, medical emergencies, or other unexpected expenses, makes it difficult to keep up with regular payments.
To initiate a payment holiday, borrowers must contact their lender proactively — do not simply skip payments, as that counts as a default and harms credit. Once the lender reviews the borrower’s situation and approves the request, the terms are set, including the duration of the pause.
During a payment holiday, interest typically continues accruing, which means the loan balance increases. Depending on the lender’s policies, the unpaid amounts might be added to the end of the loan term, extending repayment duration, or the monthly payments after the holiday may increase to cover the deferred balance faster.
Payment holidays are common for mortgages, auto loans, and personal loans. They differ slightly from forbearance and deferment, which may involve different handling of interest and eligibility, especially in federal student loans. For example, federal student loan deferments sometimes have government-covered interest.
Regarding credit impact, a payment holiday agreed upon with your lender is generally reported to credit bureaus as “current” or with a notation that assistance has been granted. This does not damage your credit score like missed payments or defaults would. However, future lenders might consider your recent financial relief arrangements when assessing new credit applications.
Common mistakes include failing to communicate with lenders, misunderstanding that the debt doesn’t disappear, and assuming a payment holiday is a permanent fix. Instead, use this time to stabilize your finances, seek additional income sources, and plan for resuming payments.
For more comprehensive guidance, see our articles on Forbearance Agreement and Factors Affecting Credit Score.
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