Coronavirus: how to apply for a car finance payment holiday

The Financial Conduct Authority (FCA) has confirmed an extension to measures on how finance companies should help drivers if they are facing financial difficulties because of the coronavirus pandemic.

Motor finance firms must extend new and existing applications for payment holidays until 31 October 2020, as well as holding off on repossessions and working with customers to agree realistic repayment plans once customers are able to afford it.

While figures from the Finance and Leasing Association (FLA) show a 78% drop in new customers in May 2020, compared with the same time last year, there's still some 6.5m new and used cars on car finance.

Here, Which? takes a closer look at the help available for car finance borrowers including how to apply, how to protect your credit score and what happens at the end of these temporary arrangements. Click on the links below to go straight to a particular question.

Read the latest coronavirus news and advice from Which?

The FCA's borrowing relief measures

On 15 July, the FCA confirmed an extension for help for those with motor finance contracts who are still experiencing financial difficulties due to the coronavirus pandemic. From 17 July, firms must offer the following options:

• Check if payments can resume: Firms should contact customers at the end of their first payment freeze to see if they can resume payments, and agree a plan on how to do so.
• Offer payment help: Customers who are still facing financial difficulties due to coronavirus should be offered support by freezing or reducing payments for a further three months.
• Extending the deadline: Customers that have not yet had a payment freeze should be able to request one up until 31 October 2020.
• Continued ban on repossessions: Customers still experiencing payment difficulties who need vehicles or goods will not face repossession until 31 October 2020.
• No negative impact on credit reports: Where a customer needs further temporary support, any payment freezes or partial payment freezes offered under the FCA's guidance should not have a negative impact on credit files. However, the FCA warns credit files aren't the only source of information which lenders can use to assess creditworthiness.

What help is there for car finance borrowers?

Drivers with hire purchase agreements such as personal contract purchase (PCP), conditional sale and personal contract hire (PCH) are covered by new rules.

One form of relief for car finance borrowers is a payment holiday. This is where you agree with your finance provider not to pay anything for up to three months. During the break, you won't be regarded as being in arrears, and you or your guarantors won't be pursued for money.

If a payment holiday isn't right for you, other options should be offered. These include:

• smaller payments if there is only a partial loss of income;
• rescheduled payback;
• deferring payments for longer than three months or
• deferring payments for less than three months where the loss of income is not expected to last that long and reviewing monthly.

Importantly, firms must offer alternatives without unreasonable delay.

The payment breaks were initially intended to operate for three months from 27 April for car owners who are either struggling financially because of the pandemic or reasonably expect they will be, but have since been extended to October 2020.

However, these measures are not intended for drivers already in financial difficulties before the outbreak. They are already provided for under the FCA's guidance on forbearance.

Forbearance is where a customer is struggling to meet priority living costs such as mortgage, rent, council tax, utility or food bills so a firm will suspend, reduce, waive or cancel further interest or charges, defer payment of arrears or accept token payments for a reasonable period.

Do I qualify for a payment holiday or an alternative?

Yes, if you or your household income has or reasonably expects to suffer a temporary loss of income or drop because of the effects of the coronavirus pandemic, you should qualify for help.

You do not need to have COVID-19 to qualify for assistance.

The FCA states that the particular needs of vulnerable customers must be taken into account, every customer's interests must be considered and they should all be treated fairly.

However, if the firm 'acting reasonably' thinks that deferring payment won't be in the customer's best interest because the debt burden will grow too high, it can offer forbearance instead.

• Are you considering asking for a payment holiday, or have youapplied forone in the past? If you'd like to tell us about your experience, pleaseemailmoney-letters@which.co.

How do I get a payment holiday?

Here are the steps to take to set up a car finance payment holiday and protect your credit score.

• Contact the firm on your finance agreement.
• Tell them you are experiencing temporary payment difficulties or reasonably expect to do so and the firm should offer to consider you for a payment holiday or an alternative.
• Make sure the firm makes it clear to you all the consequences and costs of deferring payment. You can use this article as a checklist for what you should and shouldn't pay.
• Where a holiday is agreed, you won't have to make any payments for that period. Some firms have payment systems that don't allow zero payment in which case youwill only have to make a token payment but it should be no more than £1.
• Keep in touch with the finance company if your financial situation worsens with a view to discussing other options.
• To avoid your credit score being accidentally damaged, it's really important to monitor it and ask the finance company for help if there are problems.

Will I pay more in interest?

Yes. The FCA is allowing firms to continue to charge interest under regulated credit agreements.

Firms must make clear to customers how the extra interest will increase the balance due, raising future payments.

Will I need to go through affordability tests?

No. The FCA has lifted some of the usual rules because of the pressing need for assistance. So a firm is not expected to make enquiries about personal circumstances or whether a holiday or otherwise is not in the customer's interests.

What happens after my payment holiday ends?

You will resume payments but the accrued interest means they are likely to be higher than previously.

However, before you reach this point, if you expect you will continue to struggle financially, you should contact the firm to work out a way to resolve these difficulties before payments are missed as these will harm your credit score.

If starting to repay the car finance means you won't be able to pay priority living costs, you will be entitled to be treated with forbearance, meaning the interest accrued during the payment holiday would be waived.

This same forbearance would apply if you had agreed on an alternative arrangement instead.

What happens with balloon payments?

A balloon payment is the final payment you have to make if you decide to buy a car you've been using under a personal contract purchase (PCP) deal. Otherwise, the car remains the property of the finance company.

The balloon payment is substantial and is the remaining original cost of the car you haven't yet paid back through monthly payments. The amount, known as the guaranteed minimum future value (GMFV), is fixed at the start of the PCP agreement and is based on the car's predicted value when the agreement finishes, typically after three years.

What should I expect to pay if I defer my PCP deal?

This will differ depending on the end date.

If you defer payments but stick with the original end date, when payments resume, expect an increase in your monthly payments to make up for lost time.

If you defer payments and postpone the end date, the new payments are likely to be different to the original ones but not hugely so.

This is because even though the future value of the car is likely to have dropped and the premiums will increase to make up that difference, the FCA has stepped in to say firms must not take advantage of customers here.

The watchdog has ruled that even though the predicted future value of the car may temporarily have dropped because of COVID-19, firms must not use that to increase monthly premiums to recover more of the car's original value.

Your finance company should only reduce the predicted value in line with what would have been expected had the new end date been set at the start of the PCP deal.

What are my options if I am at the end of my PCP deal?

• If you do not want to take on any further debt, you can return the car. If you can't return it because of lockdown, you must not use the car.
• If you need a car, you should consider what the balloon payment would buy you elsewhere. The car may no longer be worth as much as originally expected because the market is uncertain. You do not have to take this hit. It is down to the finance company.
• If you want to keep the car but cannot now afford the large balloon payment, the FCA has not issued specific guidance but the FLA expects customers would have to discuss deferring, staging or refinancing the balloon payment.
• If you had once planned to use the value in the car above and beyond the balloon payment value to finance another vehicle, you may need to rethink your options.
• As used car prices are lower than expected because of lockdown, if you pay the balloon payment now to buy the car, you may be paying more than you would for a similar car on sale elsewhere. It's worth shopping around to check prices.

Are there any fees?

No. Your finance company should not charge fees for setting up a payment holiday or an alternative that doesn't come under forbearance.

The one exception is where some companies have to show interest accruing at a contractual rate as a charge.

What are the hidden catches?

If you go for a payment holiday or an alternative, be aware of what that means for warranties, insurance, breakdown cover and MOTs. The finance company should point this out to you.

Where borrowers are going to take longer to pay back, this could reduce the value of the car on the trade-in.

Will deferring my payments affect my credit score?

While you are on a payment holiday or alternative and sticking to the terms, your credit score should stay as it was before the new agreement. Arrears won't be shown as building up on your credit record.

Special rules were set up in March with the three main credit reference agencies to ensure people taking agreed payment deferrals because of coronavirus won't suffer lower credit scores.

Process delays could harm your credit rating but the damage can be reversed if the delays weren't down to you. Firms and credit reference agencies should co-operate with you to correct your record.

Arrangements beyond payment deferral that involve forbearance will lower your credit rating.

Will my car be repossessed if I fail to pay?

It looks unlikely. The FCA has warned firms they could be acting unfairly if they sought to repossess a car from a customer who has a right to drive it and needs it but is experiencing temporary financial difficulties because of coronavirus.

• Find out more:How to check your credit score for free

Which? calls for extension of COVID-19 financial support

We're calling for the financial regulator to extend its help for consumers facing financial difficulties due to COVID-19 into 2021.

Our submission to the FCA recommends the following protections to prevent households facing a financial cliff edge when payment holidays, interest-free overdrafts and the furlough scheme come to an end.

• Payment holidays should be extended by three months until 31 January 2021. Lenders should continue to offer options such as payment rescheduling or freezing interest, if they are right for the customer.
• It's too early to return to existing forbearance rules, as firms with stretched resources will be unable to offer tailored support to struggling customers.
• Credit reports should continue to be unaffected by payment holidays. Anyone who accesses a payment holiday must not have their long-term creditworthiness negatively impacted.
• Timescales for complaints should be reduced so consumers can get urgent support. We have seen cases of slow handling of complaints by banks and the Financial Ombudsman.

Gareth Shaw, head of money at Which?, says: 'The regulator has acted quickly and effectively to help those struggling due to the pandemic, but it must be prepared to take further bold action to prevent millions of people from being hit by a perfect storm of financial pressures in the coming months.

'The huge number of payment holidays taken highlights the scale of financial difficulty people in this country are facing - a situation that is likely to become worse as support measures such as the furlough scheme come to an end.

'The regulator must treat all consumers fairly - ensuring that financial support is still provided to those who need it and also available for those who may face financial problems for the first time after 31 October.'

This article was updated on 14 August 2020 with information about Which?'s call for financial support extension.