Payment holiday vs cashflow relief: which is better?

Consumers in South Africa are exploring various measures to ensure that they are able stay up to date on repayments for personal loans, overdrafts, credit cards, vehicle finance and home loans, during the 35-day lockdown period.

Like its competitors, FNB was quick to provide assistance to customers in the form of a ‘payment holiday’ between 1 April – 30 June 2020.

And in a statement on Wednesday (15 April), the bank said it is also offering cashflow relief measures, which it claims is a better option.

Doret Jooste, chief executive officer of FNB Retail Money Management said that the cashflow solution is designed to be less expensive compared to the traditional payment break with a term extension, where a customer could potentially be paying ‘interest upon interest’.

Jooste said that under the ‘payment holiday’ system, fees are still levied during the break and clients’ repayments on the longer term will be based on the conditions of the existing agreement.

This means that in the long-term, the total cost of credit for a payment holiday with a term extension is significantly higher than a cashflow relief plan.

Instead of extending the customer’s term, Jooste said that FNB will allow the customer to repay the cashflow relief amount separately post the payment break, with the following benefits applicable on this Cashflow Relief account:

  • Zero fees;
  • Flexible repayment period;
  • Ability to settle this amount earlier with no penalties;
  •  The interest rate payable is prime, which could be a lower interest rate than what the customer is currently paying on their unsecured credit products such as a personal loan, credit cards or overdraft or other unsecured credit facilities;
  • Repayment will only start once the 3-month relief period is over.

“These benefits bring flexibility and real savings to our customers on the cost of their credit in the long term and is specifically designed to help our customers minimise the impact of Covid-19 on their finances,” Jooste said.

“We encourage customers to be thoughtful about the solutions they sign-up for during this difficult time, especially those who do not have insurance on their credit products.”

FNB underlined the difference between a payment holiday and cashflow relief:

Payment holiday

Cashflow relief

“Without doing the calculations on what the exact costs of a term extension will be, customers can easily interpret the term ‘extension’ as ‘skip 3 payments now and add 3 payments at the end’ and assume the total cost of credit will not change significantly.

“What the above example shows is that the customer could be paying more than 3 months’ worth of instalments due to a term extension,” the lender said.

“Our aim is to ensure that all our customers can continue keeping their financial affairs in order through this uncertain time,” said Raj Makanjee, chief executive officer of Retail for FNB.

“Our individual personal banking customers who do not have credit insurance or perhaps only have partial cover, the Cashflow Relief Plan gives customers a payment break from their monthly instalments and premiums for 3 months.

“During this time, we will pay the customer’s premiums on their behalf, freeing up their cashflow to cover other expenses while keeping their existing facilities and credit profile intact.”

In late March, FNB announced a number of payment relief measures to help individual personal banking customers in good standing before their finances were negatively impacted by Covid-19.

It said that for those customers that qualify, Covid-19 interventions will be for all products, available for a period of three months (1 April – 30 June 2020), covering the following:

  • No instalments/repayments will be due for a specific period;
  • A preferential interest rate will apply to the Covid-19 relief interventions given;
  • No fees will be charged for any relief granted;
  • Assistance with processing credit insurance claims, where possible;
  • Individualised bridge facilities for those who need it.

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Payment holiday vs cashflow relief: which is better?