In April 2020, the Financial Conduct Authority (FCA ) set out new rules for car finance lenders on how they should respond to customers who are affected by coronavirus. It followed the general “three-month payment breaks” approach used for other credit from mortgages to credit cards.
In July, the FCA these rules were extended to allow for a first or second payment break to be taken up until the end of October.
In November, after the second lockdown began, the FCA changed the rules so now you can have up to 6 months payment breaks in total and if you haven’t used up your 6-months, you can still start another break.
If you have already taken 2 three-month breaks, you can’t get another one. Read Can you afford your car finance now payment breaks are ending? for your options.
But many people won’t have had a break so far, or may only have had three months.
Perhaps you had a mortgage break and that was enough to allow you pay the car finance, but now you have used up your 6 months mortgage breaks, you can have a 6 month car finance break.
These payment break rules apply to personal motor finance:
- cars being bought on HP;
- this includes PCP finance where there is a balloon payment at the end of the agreement (often called PCP);
- car leasing (PCH).
They do not apply to HP credit for other sorts of goods or to business contracts.
The FCA says:
This guidance applies where customers are already experiencing or reasonably expect to experience temporary payment difficulties as a result of coronavirus
So it doesn’t have to be you that is directly affected, it could be anyone in your household if that is affecting your ability to make your car finance payments.
A payment deferral – interest is still charged
The FCA says that where a customer is experiencing coronavirus difficulties:
a firm should grant the customer a payment deferral for 3 months unless the firm determines (acting reasonably) that it is obviously not in the customer’s interests to do so.
This payment deferral for car finance is similar to help for mortgages and unsecured loans and credit cards. It is sometimes called a payment holiday or a payment break – these all mean the same as a deferral.
Interest is not stopped during this time, it continues to be added to your account.
- lenders aren’t allowed to add a charge for providing this deferral;
- lenders can ask for a token £1 a month payment if their system will not allow them to accept zero.
How will the accrued interest be repaid?
You need to ask your lender what will happen at the end of the 3 month period when you can go back to normal payments.
The FCA does not set out rules here. Some options may include: paying the accrued interest with larger monthly payments; making additional payments at the end of the agreement or by extending the term.
This may mean changing the terms of your agreement. The FCA says lenders can’t take advantage of this in an unfair way. I hope this isn’t going to be a problem in practice!
If you aren’t sure about what you are being asked to agree to, or you think it is unaffordable, talk to National Debtline on 0808 808 4000.
Credit records won’t be affected, but …
When a payment deferral is agreed, this will not harm your credit record. It will not show as missed payments or a payment arrangement.
But when you apply for credit in future, lenders may be able to see that you have taken payment breaks. See Covid-19 – credit score protection, but will it be harder to get credit? which looks at how this can happen.
You shouldn’t let this stop you asking for a payment break if you need it. A break that *may* be noticed in future by a lender is better than missing payments which definitely will be noticed! And it is better than talking out more credit which will cause you even more problems.
If you want to keep the car, the payments were affordable before and you hope to be able to start them again in a few months, then a payment break is likely to be your best option.
Is your contract ending soon?
Talk to your lender! It may be possible to extend the contract if you want. If you don’t want to, then talk about arrangements to pick up the vehicle if this is a PCP or PCH contract.
If you intended to make the balloon payment at the end of a PCP contract to buy the car, then have a think about what the car’s secondhand value might now be. This is what Stuart Masson says at The Car Expert:
If you had been planning to pay off the balloon and keep the car, bear in mind that used car values have already taken a sharp fall and are likely to continue falling for a while. That means you are probably paying a lot more than the car is worth if you want to keep it. You may be able to hand the car back now and buy a similar car for less money once dealerships eventually re-open.
You need to ask for this help
The lenders aren’t giving everyone payment breaks, you have to tell them why you need one.
You can ask for this help now, even though the new rules haven’t yet come into force. Many lenders are already being helpful to customers who are asking for breaks.
It doesn’t have to be you who has been furloughed or had your self-employment income dry up or is at home looking after the children – it could be your partner or it could be another adult in the house that usually pay part of the bills so you are having to pay more.
If you are asked to provide some evidence, an email from your employer or your child’s school or from a Universal Credit application or a letter from your doctor saying you are advised to self-isolate for 12 weeks should be fine.
If you just stop making payments without asking your lender to agree, then your credit record will be harmed and if you get arrears your car may be repossessed.
Would Voluntary Termination be a better option?
If you don’t want the car any more or you don’t think you will be ok again in a few months, read Voluntary Termination (VT) – how to end your car finance early and think if that would be good for you.
And if you think the payments were always too high, read Were you sold a car on unaffordable finance? which looks at whether you can make an affordability complaint.
If you make an affordability complaint you have to keep paying while the complaint goes through, which can take a long while. So here it may be good to also ask for a coronavirus 3-month payment break as well as making an affordability complaint.
These can be complicated decisions. If you aren’t sure what you should do, talk to National Debtline on 0808 808 4000.
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Can you afford your car finance now payment breaks are ending?