A lot of people are suffering financially because of the COVID-19 lockdown. That’s why financial institutions such as mortgage companies are offering customers payment holidays. But with nine out of 10 new cars being bought on finance, what happens if you need a car finance payment holiday?
Car finance holidays
On 24 April 2020, the Financial Conduct Authority (FCA) revealed that car buyers struggling to pay car loans such as PCPs should be allowed a three-month payment holiday.
The FCA said:
- Firms to provide a three-month payment freeze to customers who are having temporary difficulties meeting finance or leasing payments due to coronavirus. If customers are experiencing temporary payment difficulties due to coronavirus and need use of the vehicle, firms should not take steps to end the agreement or repossess the vehicle.
- Firms should not alter Personal Contract Purchase (PCP) or Personal Contract Hire (PCH) agreements in a way that is unfair. For example, firms should not try to recalculate PCP balloon payments based on a temporary depreciation of car prices caused by the coronavirus situation. The FCA expect firms to act fairly where terms are adjusted.
- Where a customer wishes to keep their vehicle at the end of their PCP agreement, but does not have the cash to cover the balloon payment due to coronavirus-related payment difficulties, firms should work with the customer to find an appropriate solution. Given the increased potential for disparity between the balloon payment and the value of the vehicle in the current climate, firms should ensure that solutions do not lead to unfair outcomes. For example, refinancing the balloon payment might not be appropriate in the circumstances.
First thing: contact your lender
A car finance provider won’t be able to help you if you don’t inform it of your situation. The first port of call should be to your lender. Tell them that you’re struggling and see what they can do. You don’t want to default on payments as it could affect your credit score and therefore ability to get another loan in the months to come.
Remember, you’re in quite a strong position
If you stop your monthly repayments, the finance company will have to repossess the car. They don’t want to do this for a number of reasons. First, it’s hassle. Second, they’ll have a used car that they then have to get rid of. On top of that, the FCA has ruled this is unfair.
How car finance payment holidays work
The lender agrees that you can stop paying while you’re struggling or for as long as the lockdown lasts. At the end of the payment holiday (three months), the finance company will recalculate your monthly payments, adjusting them slightly to accommodate the time you didn’t manage the repayments.
If you’re paying off a new car, the lender will probably be the finance arm of the vehicle manufacturer. These have already put measures in place. Volkswagen will offer customers what it calls ‘breathing space’ for 60 days. It won’t chase them for payment, charge extra interest or late payment interest during this time.
What if you’ve bought a car with a loan?
Payment holidays or deferral for anyone who’s bought a car with a bank loan isn’t unusual. Some charge interest over the payment holiday period, others don’t.
What about PCPs and PCH?
The Personal Contract Purchase (PCP) and increasingly, Personal Contract Hire (PCH) are popular ways that people finance new-car purchases now. Having a holiday on a PCP might cause problems with the balloon payment because the car will be older and therefore worth slightly less. But the FCA says car makers mustn’t penalise drivers for this. And they mustn’t alter any existing agreements.