Quick answer
A payment holiday is a temporary pause in loan repayments that a lender agrees to after the loan has started, usually because the borrower's income has dropped. Repayments stop or shrink for an agreed period, often one to six months, but interest normally keeps building and is added to the balance. When the pause ends, repayments rise, the term stretches, or both.
Key points
- Agreed mid-loan, usually through a lender's hardship or financial difficulty team
- Interest generally keeps accruing and is capitalised at the end
- Australian banks paused repayments for small businesses on a large scale in 2020
- Asking early, before repayments bounce, gives you far more options
Floods close a road for six weeks, a major client collapses, or a key person falls ill. Income stops but the loan instalment still comes out every Monday. A payment holiday is the lender agreeing to stop asking for a while, on the understanding that the money is still owed.
What a payment holiday involves
It’s a written variation to a loan that’s already running. The lender agrees that, for a set number of weeks or months, you’ll pay nothing or a reduced amount. When the period ends, normal repayments resume, usually recalculated.
The pause doesn’t wipe anything. On almost every business loan, interest keeps accruing in the background and is capitalised at the end, which means it joins the balance. A holiday is therefore closer to borrowing a little more than to getting a break.
It differs from a deferred repayment built into a loan from day one, such as equipment finance with no instalments for 90 days. A payment holiday is a response to something going wrong after settlement.
Why it matters in business lending
Australian businesses have seen payment holidays used at scale. In March 2020 the Australian Banking Association announced that member banks would defer repayments on small business loans for six months, with interest capitalised, and the eligibility threshold was soon lifted to businesses with total facilities of up to $10m. Many owners came out of that period owing more than when they went in.
Today, banks signed up to the Banking Code of Practice carry financial difficulty obligations that extend to small business customers and their guarantors, including telling a guarantor in writing when hardship leads to a change in the loan. Online and non-bank lenders set their own rules. Some are flexible; others will only reduce repayments rather than stop them.
Timing makes a real difference. Asked before any dishonours, a holiday is a planning conversation. Asked after weeks of arrears, the file may already be with collections.
Already behind and need a way to reset? Send us the details and refinancing can go on the table too.
Worked example: a three-month pause
A tourism operator in Cairns has a $180k loan with about $2,900 a month in repayments, roughly $1,100 of which is interest. A cyclone shuts bookings, and the lender agrees to a three-month holiday.
- Repayments skipped: about $8,700
- Interest still accruing over the three months: about $3,300, added to the balance
- Balance when repayments restart: roughly $3,300 higher than it would otherwise have been
- Result: the monthly repayment rises by around $70, or the term is extended by a couple of months
Figures are illustrative. The pause saved the business when it had no income, and cost a few thousand dollars over the life of the loan. For a temporary shock that’s often a good trade. If the business won’t recover within the holiday, refinancing or restructuring may be the better path.
Related terms
See capitalised interest for how the unpaid interest grows, and our guide on asking a lender for hardship help for how to frame the request. If repayments are already missed, what to do if you can’t make a loan repayment sets out the next steps.
Is the current loan still the right one?
Sometimes a payment holiday is enough. Sometimes the existing loan was never right for the business, and the smarter move is to restructure into something with repayments the cash flow can carry. For a second opinion, outline the balance, the lender and the event that knocked income off course. Filling it in takes a minute or so, and nothing lands on your credit report because you asked. We keep the file in-house rather than circulating it among lenders, and someone on our team works through it before ringing you. Be upfront about any missed instalments; that detail, more than anything, determines which doors are still open.
Frequently asked questions
Is a payment holiday free?
Rarely. The repayment stops, but interest usually keeps accruing. That unpaid interest is normally added to the loan balance, so you pay interest on it for the remaining term. Some lenders also charge a variation fee.
Will a payment holiday hurt my credit?
An agreed pause is very different from missed payments, which can lead to arrears and defaults. How the arrangement is recorded depends on the lender and the type of loan, so ask the lender directly how it will be reported before you agree.
Do non-bank lenders offer payment holidays?
Some do, but there's no single rule. Banks bound by the Banking Code of Practice owe financial difficulty obligations to small business customers. Non-bank and online lenders set their own policies, so ask early and get any agreement in writing.
How long can a payment holiday last?
Common arrangements run from one to six months. In March 2020 the Australian banks offered six-month deferrals to eligible small businesses affected by COVID-19. Outside that kind of industry-wide event, the length is negotiated case by case.
What do lenders ask for before agreeing?
Usually an explanation of what went wrong, recent bank statements or management accounts, and a believable plan showing when normal repayments can resume. A short cash flow forecast helps a lot.