Coronavirus: Payment freeze for car finance announced

UPDATED: The FCA guidance was formally published on Friday 24 April 2020 with no significant changes from the original draft, and will go into effect from Monday 27 April 2020.

The Financial Conduct Authority (FCA) has announced that car finance lenders should offer their customers a three-month payment freeze if they are struggling to manage their car finance bills as a result of the coronavirus pandemic.

There are also specific directives to deal with making sure customers are not penalised if they are unable to make payments, to manage balloon payments at the end of a PCP, and to make sure finance companies don’t try to rewrite contracts that unfairly penalise customers because car values have fallen.

The new guidance will apply to all regulated car finance and leasing agreements, such as:

It does not apply to personal loans or other forms of finance that are not secured against the vehicle. It is also only or consumer finance agreements, rather than business loans.

The FCA has stated that it expects all car finance lenders to offer support measures to any customer currently facing financial difficulty, as well as anyone who expects to experience dificulty, as a result of the coronavirus pandemic.

Customers who were already in financial difficulties unrelated to coronavirus are not covered, although similar support measures have always been available for customers in financial difficulty and should continue to be offered.

Should you take a payment holiday? Have a read of our guide to whether a car finance payment holiday is right for you.

The FCA has issued guidance on several points, which are:

• The FCA expects lenders 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 financial difficulties due to coronavirus, firms should not take steps to end the agreement or repossess the vehicle.
• Lenders should not change customer contracts in a way that is unfair. For example, firms should not try to use temporary depreciation of car prices caused by the coronavirus situation to recalculate PCP balloon payments at the end of the term. Lenders must 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 financial difficulties, lenders should work with the customer to find an appropriate solution.

A payment freeze (or payment holiday) means that the lender allows the customer to make no payments for a specified time – in this case, three months. It’s not automatically applied, so you’ll have to contact your finance company to request it.

However, there are still some things you need to keep in mind – mainly that, like most holidays, it will probably up being more expensive than you intended…

You will still be charged interest for the three months where you are not making any payments (because you have still borrowed the money, you’re just not repaying it). On a loan of thousands of pounds, this could amount to hundreds of pounds extra that you will have to pay back at some point.

If a payment freeze means you are pushing your agreement end date back by three months, that also means that you may incur extra expenses on your car – like road tax, car insurance, another annual service, an MOT inspection, breakdown cover and so on. These costs could add up to considerable extra financial expense, so you may save a bit now but have to eventually spend a lot more as a result.

Again, a lot of holidays are better in theory than reality. You need to weigh up what you will save now against what it may cost you down the line to decide whether a payment holiday is right for you.

A three-month payment freeze is just one of the options that may be available to you. It could be that your lender offers you reduced payments for a longer period, rather than nothing for three months. Or it could be another option, like a shorter payment holiday, or waiving interest charges, or something else. You may also be able to take a three-month payment holiday now and then pay larger instalments afterwards so that your finance agreement still ends on its original date, rather than being pushed back three months.

The new FCA guidance tells lenders that they must discuss your situation with you and suggest alternative options, like those above, if they would be more favourable to you.

You need to call your lender and tell them that you’d like to apply for coronavirus support. They’ll have to discuss your situation, as mentioned above, and inform you of your options. A payment freeze may be the best way forward or they may suggest an alternative. Make sure you keep asking questions until you’re completely happy that you clearly understand your options and their implications.

Once you confirm how you’d like to proceed, they will probably need to modify your finance agreement. This means there will be paperwork that the finance company needs to send you, and that you will need to sign and send back. It can’t be agreed and actioned over the phone or online. Yes, it’s a pain and it slows the process down considerably, but that’s how the laws written a long time before anyone had ever heard of coronavirus and they’re not going to change anytime soon.

You will receive new contract paperwork, just as you would when starting any new contract, This will outline your monthly payments, interest rate, end date and so on. Check these carefully to make sure the numbers are what you are expecting and that you’re happy with everthing – again, errors can easily occur even when everydoby is acting with best efforts and intentions.

It’s quite likely that taking a payment holiday will trigger automatic default notices and warning letters, even though the FCA has said that customers will not be penalised or pursued for not making payments. Again, this relates to the Consumer Credit Act, which is the relevant law for car finance, and the finance companies are still obliged to follow the law. The law says that they most contact you in a specific manner with specific in the event of any missed payments, so those laws still have to be obeyed.

If you get any default notices after taking coronavirus support assistance from your lender, don’t panic but do get on the phone to them straightaway to make sure everything is OK. With so many customers potentially applying for support at the same time, there’s always the possibility that errors will occur.

Obviously, with dealerships closed for the foreseeable future, it’s impossible for customers to part-exchange their old car and settle their finance agreement as would normally be the case.

You still have the options of paying off the balloon payment and keeping the car, or handing the car back to the finance company. However, the current situation means that you may want to consider your options carefully.

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.

If you were planning to give the car back to the finance company, you can still do so. However, they may struggle to physically collect the vehicle and can’t ask you to drop it off to a collection centre so alternative arrangements may need to be made.

The finance company may require you to stop driving the car, park it off the street if you are able to and then contact the DVLA, cancel the road tax and declare the car SORN (Statutory Off-Road Notification). You should also be able to cancel your insurance and the finance company will insure the car until they are able to collect it. If this isn’t feasible for you (for example, you don’t have off-street parking), then you can insist that the finance company makes arrangements to cover any road tax costs you incur.

Your existing voluntary termination rights continue as normal, so if you have a PCP or HP agreement, you can voluntarily terminate your agreement having repaid 50% of your Total Amount Payable. If you have a lease or an unsecured loan, you don’t have voluntary termination rights.

For more information, read our comprehensive guide to voluntary termination.

If your financial hardship is related to the current coronavirus pandemic, the FCA has instructed finance companies not to terminate your agreement or try to repossess your car (either with or without a court order).

If your financial hardship pre-dates the coronavirus situation and the finance company has previously advised that it intends to repossess the vehicle, you’re not covered by the latest guidance and it could still happen.

The FCA will review the situation over the next three months, and may revise its guidance if it feels it’s necessary. It is critical that you maintain contact with your finance company if your financial position is not improving so that any additional measure can be agreed sooner rather than later.

The new guidance will hopefully be finalised and published by Friday 24 April, and then come into effect immediately afterwards. The regulator has instructed finance companies to clearly communicate with customers, as well as publishing on their website, that a payment freeze option is available in the circumstances outlined above.

Bear in mind that the lenders are all currently dealing with higher-than-normal call volumes (I know all call centres tend to say that all the time, but this time it’s actually true!), so it may take a while to get hold of them. But stick with it and don’t put it off. Get your finances sorted as soon as you feel you may be in difficulty and you have a much better chance of getting through it in the best possible shape.

Should you take a payment holiday? Have a read of our guide to whether a car finance payment holiday is right for you.