Can you afford your car finance now payment breaks are ending?

Coronavirus payment breaks have been a lifeline for millions since the first lockdown started in March 2020. But now they are being restricted…

You may have lost your job or be worried that may happen. You may be back on furlough or your partner may have had their  hours cut or a self-employed business may have been badly hit by Coronavirus.

If you know you can’t pay all your debts, bills and essential expenses, can you afford the monthly car payments? If not, can you negotiate something with the lender?

Everyone affected by Coronavirus can get up to six month payment deferrals, often called breaks

On 19 November 2020 the FCA explained its new rules.

The short version is that you can only have a maximum of 6 months payment deferrals because of Coronavirus. These deferrals are popularly known as payment breaks or payment holidays. If you have been making reduced payments, this counts as a deferral.

Some examples:

• if you have already had six months deferrals for your car finance, you can’t have more. But you may be able to get payment breaks on other debts where you haven’t yet used up your six months;
• if you have been making the normal car finance payments so far, you can now take up to six months break if you need it. This could be you if you previously had a mortgage deferral for six months and that has ended;
• if you previously had four months help from your lender and then went back to normal payments but you now need more help, you can have another two months.

If you are still in financial trouble and need to keep the car, it makes a lot of sense to take the rest of your six months now.

But what happens when you have used up your six months of payment breaks?

You can still ask your lender for more help –  the rest of this article looks at what will be available to you at that point.

What sort of car finance do you have?

You need to know what wort of car finance you have:

• the most common types are Hire Purchase contract (HP) or and Personal Contract Purchase (PCP);
• you may have a lease, where you aren’t buying the car at all. These may be called contract hire or Personal Contract Hire (PCH);
• you may have an unsecured loan, perhaps from your bank. This isn’t “car finance” at all – here you own the car and the loan is just a normal loan, not a priority debt.
• you may have a business contract. This article doesn’t cover these. See Covid: ‘I don’t want them to take my cab’ for an example of a business debt and talk to Business Debtline for advice on this.

If you aren’t sure, talk to a debt adviser as it makes a big difference to the options that you have.

Lenders still have to give support, but…

The FCA says lenders must:

recognise the uncertainties and challenges that many customers will face in the coming months as the crisis develops, and provide tailored support which reflects their individual circumstances. 

So what you are offered will depend on your situation. That means you have to talk to your lender, or you may not be offered anything at all.

Lenders can agree to:

• stopping charging interest, or reducing it;
• allowing you to make reduced payments, a small token payment or even no payments for a period.

But with car finance, if you don’t make the normal payments then your car is at risk – the lender may repossess it.

So will lenders agree to accept less? You will have to talk to the lender, but before you pick up the phone you need to be clear on your options.

What you need to think about

Get a detailed budget

It’s important you work out how much you can realistically pay to the car finance. Don’t panic and offer more than will be manageable, because you will just have to phone them up in a month and ask to pay less.

Use this budget sheet from National Debtline, It can help you understand your overall financial position. And you can also show it to your lender.

You may not be sure about some numbers, especially if you are waiting for benefits to be paid or you don’t get paid the same amount each month, but this is still helpful.

And make sure you are claiming all the benefits you can. Try this benefits calculator and talk to your local Citizens Advice for help with this.

Can you afford the payments if you don’t pay other debts?

Car finance is a “priority debt” because the lender can take back your car.

(One exception – if you took out a loan and used that to buy a car, this isn’t “car finance”. You own the car and it can’t be repossessed. The loan you have isn’t a priority debt.)

With a priority debt, the lender will expect you to pay them instead of non-priority debts such as credit cards, normal loans and catalogues. See What are priority debts and bills? for details.

So if paying little or nothing to your credit cards will let you pay your normal car finance, you have to do this if you don’t want to lose the car.

Here you don’t need to talk to your car finance lender because you can pay them.

Instead, talk to your non-priority lenders and ask them to accept lower payments, or even a £1 a month token payment, and to freeze the interest and charges:

• non-priority lenders will understand that you can’t pay them because car finance is a priority debt;
• this will affect your credit score, but if you can’t afford the normal payments, there is no way around this.

The budget sheet linked to above will show what you can afford to offer to non-priority debts. If you aren’t sure if this is necessary or what to do, talk to National Debtline.

It’s usually better to terminate car finance (VT)  than have a car repossessed

If you have a Hire Purchase contract (HP) or and Personal Contract Purchase (PCP) you need to know about your right to Voluntarily Terminate (VT) car finance. Even if you want to keep the car, you should know about this in case there is no alternative as it may save you a lot of money.

Other types of car finance usually don’t give you the right to end them early.  Talk to a debt adviser if you aren’t sure what type of finance you have.

As a quick overview:

• your HP or PCP agreement will say what “half the amount” payable under the agreement is;
• if you have paid more than half you can hand the car back and not owe any more money (unless you have arrears, which you will still owe);
• if you have paid less than half you can still hand the car back now and only owe the remainder of this amount.

If a lender repossesses your car – or if you hand back the keys and don’t say you want to VT it – then you would owe the total remaining on the contract minus what the dealer can sell it for at auction.

That is often a lot more than if you terminate the finance. An example:

Say “half the amount” is £8,000. If you have paid 20 payments of £300, that is £6,000. If you VT the car you would still owe £2,000.
If your car is repossessed, you would owe the full amount of £16,000  minus what the car would be sold for at auction. If it is only £10,000 you would end up still owing £6,000.

If you are going to lose the car anyway, you should try to end up owing as little as possible! If you aren’t sure about the numbers for your car, talk to National Debtline on 0808 808 4000.

You can’t terminate the contract yourself if it has already been terminated by the dealer. So if you are sent a Default Notice, you may have to decide very fast whether to VT your contact – because after 14 days you may lose the right to do this.

This is just a brief summary. See How to terminate your car finance early, which looks at how to VT a car, its condition, mileage payments and other important details.

Can you manage without the car?

Unless you are sure your financial problems will be over soon, think about life without the car:

• in a two-car household, manage with just one;
• look at options for public transport, cycling, car-sharing, or car rental;
• if you can now work from home some or all of the time, how much less do you need a car;
• what would you do if you lost your license, or had a physical problem making you unable to drive.

Facing a financial crisis, you may have to put up with some inconvenience. Getting rid of a car won’t just save on the car finance, the petrol, servicing, car tax and insurance costs also mount up.

Obviously, if you are close to the end of a HP contract, you don’t want to hand it back as you are close to owning it.

But early in a HP contract, or in a PCP contract where you will never be able to own the car, you should seriously consider terminating the car finance if you have big money problems and you think this is going to last a long while.

If you think it’s likely you will have to lose the car in a few months, it may be less stressful to do it now and have more money to pay to your rent/mortgage.

Talk to the lender about the help you need

You have three main options:

1. pay less to your non-priority debts so you can pay the car finance in full;
2. decide to terminate the finance contract and hand back the car;
3. ask your lender to accept lower payments, or even nothing, for a few months.

If (1) or (2) aren’t going to work then (3) is your only option.  However stressful this is, it is better to ask the lender for help rather than assume you can’t get any, stop paying and have the car repossessed.

You need to talk to the lender about your situation, how likely it is to change and what you can afford to pay them each month.

Showing your lender your budget sheet can make this conversation easier. It will prove to your lender that you aren’t paying non-priority debts. And that you are offering as much as is realistic.

It may not be as hard as you think…

The lender may have thousands of borrowers in your situation.

Repossessing a car is a hassle and an expense. If a lot of cars have to be sold then prices will drop, so the lenders will end up with less.

So it is possible the lender may prefer to accept a lower payment for a few months in the hope that your situation will later improve.

Credit records

There were special rules for coronavirus payment holidays so they didn’t affect your credit score, but now arrangements with your lender will be shown on your credit record.

There isn’t a way around this. It is better to have a “payment arrangement” marker on your record that for it to just show that you have missed payments.

One exception – if you have paid more than half the payments, then you can VT your car and it will not affect your credit record at all. But apart from this, there is always going to be some negative effect on your credit score.

Your lender should tell you about your right to terminate the contract

When you talk to your lender, if you say you can’t pay the normal amounts, then the new FCA rules say:

Where it may be in a customer’s interests to exercise their right to terminate a hire purchase or conditional sale agreement under section 99 or section 100 of the Consumer Credit Act 1974, a firm should inform the customer in good time of that right, providing information in a way that is clear, fair and not misleading to help on the customer decide how to proceed.

Now if your normal payments would be £350 a month and you have offered £300 and the lender agrees to accept that and not default you, then the lender probably doesn’t have to mention that you could terminate the contract.

But if you can pay very little, or if the lender says what you are offering is not acceptable and they may default you, then they should explain that you can terminate the contract. They may not use the term Voluntarily Terminate (VT) but this is what it means.

If they say you can’t VT the car as you have arrears or haven’t paid half, this is simply wrong – all HP and PCP car finance contracts can be terminated, even if you haven’t paid half or if you have arrears.

The lender may make it sound as though this is some small print they are obliged to tell you that you won’t want to do.  But remember that VTing is normally better for the borrower than having the car repossessed.

Unsure? Get help from a debt adviser

Priority debts can be very hard to deal with. Often there are no easy options but there is support available from debt advisers.

If you need help with any of this talk to National Debtline on 0808 808 4000.

They can help you get a budget so you know what to offer the car finance lender and your other debts. Knowing more about your different options may make things clearer.

And if you aren’t sure what the lender is saying, or you would just like to see it in print, ask the lender to email you with the details. Then you have some time to think about it and talk to a debt adviser.

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