Leo took out a loan in June 2022 to buy a car.
In November 2022 the lender sent Leo a text message saying that, because he was a loyal client and had no arrears on his account, he was eligible for a payment holiday period over the festive season. The text message piqued Leo’s interest because it was his first year of buying Christmas presents, planning a week away with family, and paying his vehicle loan.
Leo phoned the lender and asked them to explain the terms of a payment holiday period. The lender explained that
- The payment holiday would allow Leo a period of four weeks where he would not have to make any payments towards the loan.
- The lender would not charge arrear fees over this four-week period
- To offset the missed payments, the lender would extend the loan term.
Leo thought this sounded great and applied for the payment holiday. The lender approved the application.
The payment holiday included
- No weekly repayments to be made for four weeks
- Loan term extended by eight weeks.
A few months later Leo realised that his four-week holiday period resulted in his loan term being extended by eight weeks, not the four weeks he’d been expecting. Leo was unhappy about this and complained to the lender.
The lender could not resolve Leo’s complaint and he complained to FSCL.
Leo said that, when he applied for the holiday period, he was under the impression that a four-week holiday period meant a four-week loan term extension. Leo said that he understood the lender’s explanation, that he would not be liable for arrear fees, to mean that he would also not have to pay any interest over the four weeks.
Leo felt that it was unfair of the lender to extend his loan by eight weeks when he only received a four-week holiday period.
The lender said that, although they did not charge arrear fees over the holiday period, interest kept accumulating, which resulted in the four-week extension to the loan term.
We reviewed the variation agreement signed by both parties.
The variation agreement clearly stated that, although arrear fees would not be charged over the holiday period, interest would continue to be charged and the loan term would be extended by eight weeks to cover this.
It was our view that, although Leo did not realise that interest kept accumulating, the agreement did not cause him financial hardship and the lender was entitled to charge interest over the four-week holiday period.
We suggested that Leo discontinue his complaint. Leo was disappointed with the outcome of our investigation but agreed to discontinue his complaint.
Insights for consumers
When considering applying for a holiday or loan payment deferral period, it is important to note that
- interest will continue to be charged during the holiday period, meaning the term of your loan will be extended by more than the length of the holiday period
- you will end up paying more in interest due to the loan term being extended
- you should never be charged arrear fees during the holiday period.