Credit life payouts and payment holidays are on the cards. But it will only be for those who are directly impacted by the lockdown, and will come with Ts and Cs.

While we are expecting more announcements from the banks, they have all indicated that they will be offering payment holidays to those who are unable to meet their commitments due to the lockdown. This will most likely be done on a case-by-case basis.
All banks have confirmed that credit life insuramce can be used for repayment relief. Credit insurance policies have a “loss of income” provision which kicks in if your employer has forced you to take unpaid leave or is unable to pay you due to the lockdown. It also covers you if you contract the Covid-19 and are unable to work.
Under the loss-of-income provision and retrenchment provision, your debt repayments could be covered for up to 12 months or until you earn an income again – whichever is shorter.

Unfortunately, many people opted out of credit insurance, especially when it came to their mortgages or car finance. Lee Bromfield of FNB Life says that only about 25% of their debtors book has credit insurance. However, lenders focusing on short-term loans such as African Bank, Capitec and Bayport tend to have a higher percentage of credit insurance policies as this is often a compulsory insurance. Standard Bank has also confirmed that credit insurance was compulsory on home loans for people earning less than R25 000 a month.

Credit providers will each have their own specific cover, so you need to speak to your credit provider for details. In some cases, the loss-of-income provision would only apply to loans or insurance taken out post August 2017 when new regulations were issued by government requiring credit insurance to provide this protection. However, Nedbank and Standard Bank have announced that they will extend the cover retrospectively to those who took out the cover prior to 2017. African Bank’s cover also extends to loans taken prior to 2017.

 

Debt repayment holiday

 

At this stage Standard Bank is the only bank to offer a blanket payment holiday to small businesses with a turnover of less than R20 million. The applies to all loans taken by the business including overdrafts, credit cards, car finance and mortgages. This is an automatic payment holiday commencing on 1 April 2020 and running through to the end of June 2020. Businesses that do not want to take the payment holiday will need to inform the bank. In addition, all student customers still studying full time with a Standard Bank Student Loan will receive a payment holiday over the same period at 0% interest and with zero fees.
The banks have all announced debt relief options to customers who cannot afford to meet their repayments, however you need to specifically request this option – it is not automatic.

 

The banks have notified customers that debt payments can be deferred or reduced for three months. However, in all cases, interest, fees and any insurance premiums will simply be added to the principal debt. So, while this may provide cashflow relief to those who are genuinely affected by income loss due to the lockdown, it should be avoided if at all possible.

To provide an example, if you have a mortgage of R650 000 over 20 years, if you maintained your bond repayment of R6 234, after three months the value of your home loan would have dropped to R647 326. If you took the payment holiday of three months your outstanding home loan value would have increased to R666 165. So, you would either extend the term of your loan or increase your repayments.

Most of the banks are capitalising the interest on the existing loan, however FNB has taken a different approach. They are effectively issuing a new loan, to cover the missed payments, at an interest rate of prime and no fees. This means that you would pay off the loan separately to your existing credit agreements. While this option may not make sense for your home loan if you have a rate below prime, it will provide some interest relief for more expensive debt such as car finance and personal loans.

It is also important to note that banks are currently only offering this to customers who were in good standing prior to the lockdown, so this is not available to customers who were already missing payments.

If you do select the payment holiday, this will not affect your credit score as it will not be viewed as a default. Before you sign up for a payment holiday, speak to your credit provider to make sure you understand the implications, and that you are not just kicking the debt can down the road.

What is not clear yet is how people under debt review will be treated. While debt counsellors wait for further information from the banks, Paul Slot of the Debt Counsellors Association of South Africa says in the debt review industry there is a standard “change of circumstance practice” where the debt counsellor can request approval for lower payment from credit providers.

“In this process the debt counsellor will obtain proof of loss of income, redo the consumer’s budget and then motivate for a reduction in payment for a month or two. Approval of this request is at the credit provider’s discretion. If not approved, the credit provider can proceed with legal steps.”

Benay Sager, Chief Operating Officer at DebtBusters says before opting for a payment holiday you need to understand the terms and conditions.

“A payment holiday is very good news for someone who is facing a short-term cash crunch as a result of the lockdown, but it’s possible that the interest will keep running, even though payments are paused. This means that the total payment at the end of the loan term may be more than the original total. This doesn’t mean it’s an option that shouldn’t be considered if you’re facing a cash crunch, as long as you’re aware you may be paying back a bit more.”

He says that whether a leniency policy is in place or not, anyone who is struggling to make repayments should contact the lender immediately and try to agree a repayment plan. If they are not able to negotiate affordable repayment terms themselves or owe too much to too many lenders, they should contact a reputable debt counsellor.