Coronavirus UK: how a car finance payment holiday works, costs, risks, impact on credit rating and more

If you’re struggling financially due to the COVID-19 pandemic, you could apply for a car finance payment holiday. We reveal how this works, the risks and how to apply.

Car finance payment holidays offered to motorists

The Financial Conduct Authority (FCA) has recently introduced new measures to help UK motorists struggling with car finance payments.

So, if you haven’t been able to get a payment holiday to date, it may be easier now.

We reveal everything you need to know if you want to apply for a car finance payment holiday.

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What is a car finance payment holiday?

A car finance payment holiday defers payments for those struggling to meet finance or leasing agreement costs for up to three months.

It’s worth stressing this agreement could be less than three months, as the length of the payment holiday depends on your personal circumstances.

Money Advice Service recommends you only take a car finance payment holiday if you need it – and recommends planning ahead so you know what to do when you have to restart payments.

How do I apply for a car finance payment holiday?

You’ll need to contact your car finance provider to let them know you’re experiencing financial difficulties and to apply for a payment holiday.

You can apply to defer payments at any point before 27 July.

The types of car finance agreements that are eligible for a payment holiday includes:

• Personal Contract Purchase (PCP)
• Contract hire
• Hire purchase (HP)

Unfortunately, you can't get a payment holiday on car finance deals for business purposes.

It’s worth checking your finance provider’s website to see how its helping customers during this difficult time and whether it recommends getting in touch over the phone or online.

You may need to be patient when trying to get in touch as these businesses are probably experiencing a surge in calls from customers needing help.  

When considering a payment holiday, the car finance firm may look at how much you’ve already paid and the amount that will be covered if your request if approved.

They should discuss any increases in monthly payments and the overall amount due after the agreement ends (if this is approved), as well as knock-on effects on other things such as insurance.

They can reject your application if they think you’ll be worse off by taking a payment holiday.

For example, the FCA says a payment deferral may not be in a customer’s best interests if it gives them a ‘greater overall debt burden’ when compared to other solutions.

So, the car finance firm may offer support in other ways – they could temporarily accept lower payments, a rescheduled term or offer a shorter payment holiday.

With any alternative arrangement, it’s worth checking if it’ll affect your credit score. You might be able to ask for any negative marks on your credit report to be removed during this difficult time.

Unfortunately, you can’t simply cancel payments as this would break your agreement and could impact your credit rating.

If you miss a payment but have been trying to reach an agreement with the car finance firm, you should ask whether they can remove any reported missed payments on your credit report.

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What charges can I expect?

You won’t get hit with extra fees or charges during a payment holiday, but you’ll still be charged interest over this period.

The amount of interest you’ll pay obviously depends on the finance agreement you have. It’s worth considering how much interest you’ll have to pay every month and whether you can afford this.

You should think about how you’ll tackle higher payments after the deferral period ends – you could try and save a set amount every month or look at other ways to boost your income during this time.

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Will my credit rating be affected?

If you take out a payment holiday during the COVID-19 pandemic, your credit rating should not be affected, according to the Money Advice Service.

But if you cancel payments without getting a payment holiday approved or miss any payments after your arrangement ends, your credit rating will likely be impacted.

So as mentioned earlier, make sure you speak to your provider, however long it takes, and get it confirmed before you stop payments.

Can my car be repossessed?

The FCA says if someone needs to use their vehicle and finds it difficult to pay due to the coronavirus pandemic, the company should not try to end the finance agreement or repossess the car.

On top of this, the car finance firm shouldn’t alter any agreements to make them unfair.

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What if I can’t afford the balloon payment?

A balloon payment is a final payment for a car on a finance agreement, which is based on the future value of the vehicle that has been deferred to the end of the contact.

If you’re near or at the end of your car finance deal and want to keep it but can’t afford this due to COVID-19 related financial difficulties, contact the company in question.

The car finance provider should offer a solution that doesn’t lead to an unfair outcome. For example, refinancing the balloon payment might not be appropriate as car values are likely to have recently fallen.

If you’re coming to the end of your agreement and don’t want to keep the car, let your finance provider know, so they can arrange the safe return of the vehicle, which you’ll no longer be able to use.

You need to apply for a Statutory Off Road Notification (SORN) declaration if you’re the registered keeper of the car and the finance provider wants to stop taxing and insuring it if it’s ‘off the road.’

The car has to be parked on a driveway or in a garage to meet these criteria.

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What if I can't pay after my deferral period ends?

You should talk to your car finance provider if you’re still struggling to pay once the payment holiday ends as they may be able to offer further support.