On 17 April the FCA published its proposed guidance for car finance lenders on how they should respond to customers who are affected by coronavirus.
Earlier this week FCA guidance for unsecured loans came into force. Car finance wasn’t included with that as the FCA said it wanted to look at it separately.
Now we have the details of what the FCA is proposing for car finance. It broadly follows the general “three month payment breaks” approach that is being used for other credit.
There is a very short consultation period. It is expected the final guidance will be published by Friday 24 April.
What the FCA is proposing
Does this apply to you?
These proposals 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. Nor does it apply for business contracts.
The FCA has set out a broad definition of who will be covered:
This guidance applies where customers are already experiencing or reasonably expect to experience temporary payment difficulties as a result of coronavirus
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 three month 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 3 month 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.
Your credit record will not be affected
When a payment deferral is agreed, this will not harm your credit record. It will not show as missed payments or a payment arrangement.
If you have already made arrangements with a car finance lender and this has affected your credit record, the FCA says that the lender should now correct your credit record.
If you have asked for a payment break and it hasn’t been organised before you miss a payment because the firm hasn’t responded to you or got the break set up, then missing a payment should not affect your credit record.
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.
Do you have a better option than a payment break?
Not everyone will need a 3 month break from making any payments. If you think you only need 1 or 2 months, or you can make reduced payments, then talk to your lender about this – it will reduce the interest that is accruing on your account.
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.
Other options if the car isn’t affordable
But if you don’t want the car any more or you don’t think you will be ok again in a few months, then 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.