What is a repayment holiday?

Everything you need to know about repayment holidays for PCP finance, Hire Purchase and PCH leasing contracts

Sam Naylor
Sep 17, 2020

Taking out finance of any kind is always a risk, since unforeseen events can impact your ability to pay the money back. There are a few ways that you can get help to avoid going into debt by falling behind with your payments, though. One of these is called a ‘repayment holiday’, also known as a payment deferral or a payment freeze.

The term has appeared frequently in the news since the start of the coronavirus pandemic, and it’s now available for those with car finance and leasing contracts, to help those affected by the lockdown and the subsequent economic downturn. It’s important to be aware that this option to pause payment doesn’t come for free: you’ll have to pay more in the future to make up the difference.

Read on to find out more about what a repayment holiday actually is, what’s involved and the potential outcomes of taking advantage of one.

Repayment holiday: what is it, why do I need one?

The concept of a payment holiday, or freeze, is straightforward: your finance provider allows you to stop your monthly payments for a short time - providing support to those encountering financial problems - and then resume later on. These are available to those who drive a car funded with Personal Contract Purchase (PCP), Hire Purchase (HP) and Personal Contract Hire (PCH) - also known as leasing.

The Financial Conduct Authority (FCA) - which regulates financial markets - took action in 2020 to make repayment holidays of three months available to anyone experiencing financial difficulty because of the global pandemic - the scheme is expected to continue until 31 October 2020. If you’ve already taken a payment holiday, it may be possible to extend it.

Any kind of financial difficulty is a reason to ask your finance provider for a payment holiday, even if it’s someone else in your household that has come into trouble, but the decision is yours to make. You may prefer to dip into your savings if need be, rather than deferring payments now and having more to pay in a few months, for instance.

Be aware, too, that there are financial consequences to freezing your payments, before you make the decision. Delay payments now and you’ll still have to pay all of that money back later - plus additional interest - so a payment holiday now is not free money. Keep reading for more details.

Your finance company is obligated to offer some other kind of help if you can’t afford to make repayments, even if they decide not to allow a payment holiday. This can take many forms and will really depend both on your finance provider and your own situation - for example, they may be able to offer reduced payments instead of a total freeze.

How to take out a repayment holiday

The only way to find out if you are eligible is to get in contact with your own finance provider, as no two cases will be the same. The finance company should provide information on the options available to you if you encounter financial problems, before you sign up to a finance agreement, so it pays to do your homework before committing.

Your lender is likely to discuss your history of making payments, the amount you’ve paid back already and the increased payments that a freeze now will cause in the future. The finance company may, for instance, decide that deferring payments now may make them unaffordable when the freeze comes to an end and so offer an alternative course of action.

The finance company can also change the contract terms to help - such as lengthening the contract to reduce monthly payments - but firms are expected to act fairly here and not make you worse off by doing so. They should not charge you any extra fees to set up a freeze, either.

Some finance firms are not regulated by the FCA. This means that they do not have to follow the same rules. They may still be able to offer help but you will need to speak to them directly to find out more.

What happens after the payment holiday ends?

This is the most important factor to consider with repayment holidays, as for some it could lead to even greater hardships further down the line. It’s down to the lender to decide what happens next but there are a few possible outcomes.

The first is that your monthly payment goes up to cover the missed payments. The finance company can’t make changes to the payments unfairly, for example to make up for the fact the car may be worth less than expected when you give it back, but they can add to your monthly bill to make up the lost cash from you not making payments for several months. Alternatively the lender could simply extend your agreement by three months, and you keep paying at the normal rate.

In either of these scenarios, you can still be charged extra interest, so be aware of this when discussing with the lender. It may be that they wish to add the interest on at the end of the agreement, which could make those three months’ payments sting quite a bit - for example, a £100 per month payment that was frozen for three months could end up costing you £120 per month or more in the end.

With a car there’s another angle to consider, which is the item itself. For example, if you keep the car for three months longer than expected, you may end up having to pay for a final service that would otherwise not be your problem as you’d have handed the car back by this stage.

You’ll also have to pay for insurance and tax to cover the car if you drive it or park on a public road. Meanwhile, if keeping the car for these extra three months means it will be just over three years old before you hand it back, you’ll also need to get the first MOT sorted, which otherwise would not be needed

It’s clear that while a repayment holiday can cut your costs in the short term, it’s best used as a last resort, as it’ll cost more in the long run. However, if you’re in a tricky situation, it could give you just the headroom you need to start a new job or save a bit more money, so that making future monthly payments is less problematic than it would otherwise be.

Will a repayment holiday affect my credit rating?

You can find out more about how a repayment holiday will affect your credit rating here, but the short answer, as with all financial matters, is that it depends on your own circumstances.

Current advice is that payment freezes brought on by coronavirus-related hardship in 2020 should not adversely affect your rating, but using one is logged on your record and may have some bearing on future finance applications.

More generally, a payment holiday will leave a mark on your file, as it indicates a diminished ability to make repayments. Future lenders will consider this like they would with any request to cut payments. Speak to your lender to find out the exact details for your case, but be aware that anything that questions your ability to pay - whether agreed with the lender or not - may make finance companies less keen to lend to you in future.

What are the alternatives to a repayment holiday?

Your lender may turn down your application for a payment freeze - or you may simply choose not to take advantage of one - but there are alternatives that they can offer to help you out. It may simply be the case that their system doesn’t allow a payment of zero from you, so a token £1 or so per month would be charged instead of the full amount. All the financial consequences listed above would still apply.

The company could also offer a payment holiday of less than three months, or switch to interest-only payments. It may also be possible to simply lower the payments to an amount you can afford for a little while - which could mean that your £300-per-month car costs you £150 per month for a couple of months, for instance. Again, you’ll end up paying more in the long run, but this could offer some short-term relief.

The lender’s last resort is called forbearance, which is where it offers a reduced rate, suspended payments or even waives some part of the debt. This is only used for those who are in such serious financial trouble that they cannot afford higher-priority basic living costs such as utility bills or council tax. This is likely to leave a more serious mark on your credit history, which could make it more difficult to borrow money in future or mean that you have to pay higher interest rates to cover the additional risk to the lender.

It’s also worth noting that using Voluntary Termination - which is available on PCP finance and Hire Purchase contracts - may be a better option for some. If you’ve paid back more than half of the total amount payable, then you could be able to return the car with nothing else to pay.

Be aware, however, that with PCP you’re only likely to get to this stage near the very end of the finance contract - if at all, should the car have a particularly high optional final payment. Meanwhile, with Hire Purchase you’re more likely to lose out by having already paid more than half the total balance, so you could be better off selling the car - with the explicit permission of the finance company, since they still own it - and recouping any value in it above the remaining finance balance.

While you’ll be without a car, this could be preferable to having to face the added costs you'll incur with a repayment holiday, which might make the difference between keeping your head above water or going into debt.

 

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