Coronavirus: three-month car finance payment freeze introduced

Car finance providers should offer 'payment holidays' to those in temporary financial difficulty due to coronavirus, says finance regulator

Christofer Lloyd
Apr 27, 2020

Have a car on finance, but are struggling to make payments due to financial issues brought about by the coronavirus pandemic? You may be able to take advantage of a three-month payment freeze, thanks to action taken by the finance industry regulator, the Financial Conduct Authority (FCA).

The FCA expects car finance providers to offer a payment freeze - where instalments are put on hold for a short period of time - to help drivers get through any temporary difficulties in meeting finance or lease payments caused by the coronavirus outbreak. In addition, firms should not end finance contracts or reposesses vehicles for customers whose financial difficulties have resulted from the global pandemic.

Can I put my car payments on hold for three months?

Guidance applies to companies that issue 'regulated motor finance agreements' specifically in the exceptional circumstances resulting from the coronavirus outbreak. This covers Personal Contract Purchase (PCP) and Hire Purchase (HP), along with Personal Contract Hire (PCH) - also known as leasing - and other arrangements where the company providing the finance is also supplying the car.

These instructions apply to those who are experiencing temporary trouble in making finance or leasing payments due to a reduction in their income - or that of other household members - as a result of coronavirus, or those who expect to encounter imminent financial difficulties. Drivers with pre-existing financial difficulties, meanwhile, are covered by standard finance rules, which means that finance providers may consider deferring payment of arrears or suspending, reducing, waiving or cancelling additional interest and/or charges, or accepting token payments rather than the full contracted monthly figure for a period of time.

Other rules from the FCA state that companies should not change customer contracts in any way that is unfair. This includes reducing the optional final payment (which reflects what the car is expected to be worth at the end of a PCP finance contract), which in turn could increase monthly payments.

Furthermore, where drivers reach the end of a PCP deal and want to keep the car but do not have sufficient cash to make the optional final payment to buy it, due to coronavirus-related financial difficulties, companies should work with drivers to reach an appropriate solution. 

The FCA plans to review guidance after three months to account for developments in the coronavirus situation.

What is a three-month 'payment deferral'?

This three-month pause on payments, referred to as a 'payment deferral' - or sometimes a 'payment holiday' or 'payment freeze' - involves typical monthly payments for a car being put on hold for three months. This is an arrangement between drivers and the finance company where the firm allows customers to make no payments - or a token payment of £1 per month, where the finance provider's system is unable to accept nothing being paid - for a specified period, without them being considered to have fallen behind with payments.

As the customer is not considered to be in arrears, firms should not pursue any relevant guarantors for payment during the agreed period. Where a driver wishes to make use of the payment deferral option, the company should agree to a three-month deferral unless the company deems that it is not in the customer's interest to do so.

An example of this is where deferring payment would be considered to cause greater financial issues for the customer - through increased debt amounting from the additional interest due at the end of the payment deferral period, for example - than other options, such as making reduced payments for three months or by extending the contract length to allow lower monthly payments.

It is unclear whether the FCA will introduce additional measures to support drivers at the end of the initial three-month period, but this is likely to depend upon the impact the coronavirus is having on jobs and individuals' ability to work at that stage.

Do I have to pay any extra fees?

No charges or fees should be issued to allow drivers to defer their payments. However, be aware that in delaying payments, additional interest will build up compared with making the scheduled payments.

The exact amount of extra interest charged will depend upon how much your monthly payments are, what rate of interest you're being charged and the length of time your payments are delayed by.

The greater your monthly payments and the longer you defer your payments, the more additional interest you can expect to pay. Similarly, the higher the interest rate, the quicker interest charges rack up. In some cases, however, lenders may agree to waive extra interest charges during the deferral period.

Will taking advantage of a payment freeze affect my credit rating?

Falling behind with scheduled car finance payments would normally result in a black mark on your credit file. This would typically make it harder to get finance in future and mean that you can't take advantage of the lowest interest rates.

However, the FCA has stated that finance companies should not class coronavirus-related deferred payments as drivers falling behind on payments on their credit file. On the other hand, if you defer payments and then require additional support - such as waived interest or charges, finance companies are likely to reflect this on your credit file, which you can expect to have a negative impact in future. 

Should you be unable to reach an agreement to defer payments with the finance company in time - because of operational difficulties, such as reduced staffing due to coronavirus - and subsequently miss a payment, which is logged on your credit file, finance companies should work with you and credit reference agencies to make sure that your credit file is updated so that no coronavirus-related arrears are registered. This also applies if you have agreed deferred payments with the company and it has mistakenly flagged this on your file as you being behind with your payments.

PCP: optional final payment (also known as GMFV) being lowered

PCP finance monthly payments are affected by the car's initial value and what it is expected to be worth at the end of the contract - represented by the optional final payment on most finance documents. The higher this figure is, the lower your monthly payments, but the more you have to pay if you want to buy the car when the contract ends.

Since most drivers who opt for PCP finance drive the car for the length of the contract and then hand it back and take out a new contract on another car, the most affordable deals are those where the car has a high optional final payment - as you pay a smaller proportion of the car's original price.

Normally the optional final payment is fixed when you take out the contract. However, in exceptional circumstances - such as the coronavirus outbreak - the finance company may seek to start a new contract part-way through the original agreement.

The FCA has determined that firms should not change any of the original finance terms to take advantage of customers' weaker position. This includes lowering the optional final payment to increase monthly payments.

What happens if my PCP contract finishes by the end of July 2020?

If your car is on PCP finance and the contract comes to an end before August, new guidelines have been introduced for your lender. Where drivers wish to keep the car but do not have the cash to make the optional final payment to buy it there and then - again, due to coronavirus-related financial difficulties - companies should work with them to find an 'appropriate solution'.

On the other hand, if your finance agreement ends within this three-month period and you do not want to keep the car but are unable to return it - if it is impractical for coronavirus-related reasons - you will be unable to keep driving it, since you're not paying for it.

Your finance company should also inform you that you will need to make a 'Statutory Off Road Notification' (SORN) declaration if you are the registered keeper but no longer paying to have it and then can stop taxing and insuring it, as it is 'off the road'.

What happens should any damage happen to the car while SORNed or if it is stolen - and whose responsibility the car is in these circumstances - is yet to be confirmed. However, as a result, it's best to discuss your responsibilities at the end of your contract with the finance company, if the car remains in your care as you cannot return it, but you have stopped paying for it and no longer insure it.

Can my car be repossessed due to coronavirus?

If you take out finance which is secured on your car, it is possible for the lender to repossess the car if you fail to make payments for a sufficient amount of time. If you defer payments due to the coronavirus outbreak, however, finance companies should not terminate your contract or take steps to repossess the car while you're experiencing temporary difficulties in meeting payments and need to use the car.

If your financial difficulties are not due to coronavirus or pre-date the outbreak, finance companies will have to consider social distancing rules to establish whether repossession is possible and, if so, how it should be carried out.


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