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.
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:
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:
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.
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.
Here are the steps to take to set up a car finance payment holiday and protect your credit score.
Yes. The FCA is allowing firms to continue to charge interest under regulated credit agreements.
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.
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.
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.
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.
No. Your finance company should not charge fees for setting up a payment holiday or an alternative that doesn't come under forbearance.
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.
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.
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.
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.
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.
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.