Car owners with secured finance on their vehicle (PCP, HP or conditional sale) or on a lease (personal contract hire) who have had their household incomes impacted by the coronavirus pandemic will be offered the chance to take a three-month ‘payment holiday’ to help them manage through the next few weeks of lockdown. But should you take up this offer?
While the idea of not paying off your car finance bill for the next three months may sound attractive, especially if you are struggling with a sudden reduction in your salary, there are a number of things to consider first. Your finance company is supposed to discuss these implications with you before agreeing to a payment holiday, but for the best independent and impartial advice, The Car Expert is here to help.
If you’d like to hear more tips and advice on car finance and the coronavirus pandemic, have a listen to my podcast on BBC Radio 4’s Money Box programme.
First, let’s start by explaining what a payment holiday is really all about:
What is a payment holiday?
A three-month payment holiday means that you don’t make your normal car finance payments for three months. This may be very helpful for your short-term cashflow, as it could save you hundreds of pounds per month at a time when your income has fallen by at least that much or more. However, there is definitely a catch. You will save money now, but you will end up paying more – possibly a lot more – later on.
It’s important to remember that you will still have to make up for those three months later on – those payments don’t just disappear. You can choose to either extend your finance agreement by three months, or you can pay extra per month one your payment holiday ends to keep to your original end date. We’ll look at the implications of each of these in a moment.
The name ‘payment holiday’ has become very popular in the media, but actually it’s a terrible description. A holiday conjures up a carefree escape from your everyday headaches, before returning to life as normal refreshed and ready to carry on. This isn’t like that. In fact, the only thing a car finance payment holiday has in common with any other holiday is that it will involve unexpected expenses and end up costing more than you expected it to when you booked it…
A ‘payment deferral’ is what the Financial Conduct Authority (FCA), which is the UK’s financial services regulator, calls it. However, even that doesn’t really cover the full implications. A deferral implies that you are simply pushing your costs back a few months, but that those costs won’t change. That almost certainly won’t be the case. The same applies to ‘payment freeze’ or pretty much any other description. Whatever you want to call it, just remember that you’re saving money now but you will pay more eventually as a result.
Who is eligible for a car finance payment holiday?
To be eligible for the payment deferral, you must have a current car finance or lease agreement, which will probably be one of the following:
Other forms of paying for your car, such as a personal loan or your credit card, are not covered. Plus this only applies to consumers (personal use purchasers) rather than businesses.
In addition, this support is directly related to the current coronavirus pandemic. Your household must be experiencing – or reasonably expect to experience – temporary payment difficulties as a result of coronavirus. If you are in financial difficulties for any other reason, it doesn’t apply to you. If you’re not in financial trouble and don’t have an expectation that you will be anytime soon, you’re also not covered by this.
Note that I said your household rather than you. If your own income is unaffected but anyone else in your household is in difficulty (spouse/partner, other family members, etc.), and that’s causing your overall household to struggle, then you still qualify.
Why should I consider a payment holiday?
If your household income has been cut as a result of you being put on furlough, or if you’ve lost work because you’re a freelancer or self-employed, then paying your normal monthly bills could become difficult very quickly. Many people have already seen their income cut by hundreds of pounds per month, and many more are facing the same prospect very soon.
If you have a car on finance, it’s probably taking up a big chunk of your monthly income. Not having to make that payment for the next three months could help relieve that strain in the short term. For many people, it will be a much-needed financial lifeline.
But you need to consider the implications of taking that lifeline, so let’s look at those now.
What are the problems with taking a payment holiday?
A three-month payment holiday will introduce additional cost to your overall car finance agreement. How much extra will depend on your particular circumstances, but you could be up for any of the following:
Interest
The finance company can still charge you interest for the three months of your payment holiday. Depending on how much you have borrowed, this could be £100 a month. You don’t have to pay it back now, but you will have to pay it back eventually. And if it gets deferred to the end of your agreement (which could be in a couple of years’ time), that interest will keep going up.
I recently saw a hire purchase finance agreement where a customer is usually paying about £44/month in interest, but will end up paying £63 for each month of his payment holiday as the interest is being deferred to the end of his agreement, which won’t be for another four years.
You can negotiate how and when you repay this additional interest with your finance company. The sooner you can clear it, the less it will cost you – much like your credit card payments. The finance company does not have to agree to this, but it is obviously in their interest to make sure you can repay your debt so they should at least be happy to discuss options with you.
Of course, if you’re lucky enough to have a 0% APR finance agreement, then this won’t apply to you. But that is an exception, rather than a rule.
Monthly payments
If you are extending your agreement by three months, your monthly payments should return to their normal amount when your payment holiday ends – however, your agreement will run for three months longer to compensate. You can negotiate with the finance company to add the extra interest above into your payments rather than paying it in one hit if you prefer.
If you would rather keep to your original end date, you will have to increase your monthly payments to compensate for the three months where you paid nothing during your payment holiday. Depending on how many months you have left on your agreement, that could easily add another £50 or more to your monthly car finance payment, increasing your expenses at a time when the world is still gradually recovering and your financial position may still be precarious.
The FCA has told finance companies that they can’t modify agreements to unfairly take advantage of the current situation. In other words, they are allowed to modify your finance agreement to reflect new dates or repayments, but they can’t charge you any fees and they can’t fiddle with your payments to allow for the sudden fall in used car values that have resulted from the coronavirus.
Running costs
For most people on car finance, extending your agreement by three months will almost certainly trigger some extra costs that you wouldn’t have had to pay if your agreement ended on its original date. These include any or all of the following:
- annual service
- MOT inspection
- road tax
- car insurance
- extended warranty
- breakdown cover
Most people with a PCP car finance agreement would normally be able to give the car back or part-exchange it just before its next service is due. However, by extending your finance agreement for three months, you may now find that you need to have it done. That could easily cost hundreds of pounds that you will now have to pay.
Similarly, it may mean that you need to pay for an MOT test, even allowing for the government offering all vehicles a six-month exemption over the next year. If you bought a new car on a three-year PCP and thought you wouldn’t have to worry about an MOT test, you’ll now probably have to get that done. The test itself might only cost £50 or so, but it could potentially get much more expensive if the inspection reveals that you need new tyres or any repairs to keep your car legal.
Road tax and car insurance are expenses that you’d have to pay anyway, but it may still cost you more money if you have to renew them and then cancel them a few months later. The DVLA will steal a month’s worth of road tax from you because they can get away with it, and your car insurer will charge you an admin fee to tranfer your insurance from your current car to your next car.
Extended warranty and breakdown cover are optional costs, since you don’t have to have either, but it’s still worth bearing in mind – especially if you have to pay for them and then only get a partial refund when cancelling a few months later.
Do I have any other options?
Quite possibly, yes. A three-month payment holiday is not the only means of support that a finance company can offer you, and the best option will depend on your circumstances. If you call your finance company to request a payment holiday, they are obliged to discuss your particular circumstances to see if there are any other alternatives that may be more helpful to you.
This might mean waiving interest or offering you reduced monthly payments for a period of months, rather than paying nothing at all. If your agreement is ending reasonably soon, they might suggest voluntary termination or offer you a shorter deferral period instead of the publicised three-month payment holiday. The FCA is clear that finance companies must consider both your immediate situation and your overall agreement, and that they must act in your best interests.
Summary
As I said earlier, for many people a payment holiday on their car finance will be an absolute financial lifeline. That’s fine, and that’s what it’s there for. However, there will inevitably be a lot of people who think they should take it just because it’s available, and that’s almost certainly the wrong approach to take.
If you quickly add up all the extra interest and additional running costs that are likely to affect you by taking a payment holiday on your car finance, it could easily add thousands of pounds to the overall cost of your car. You need to consider these numbers carefully to decide whether you think it’s still a good idea to take that payment holiday now.
Also bear in mind that there are offers of support on other household expenses available as well. It may be that taking a payment holiday on your mortgage or your credit card is a better bet for your specific needs, rather than your car finance.
Talk to your finance company. Yes, you’ll probably spend a lot of time on hold in a queue, but it’s not like you can go to the pub so you may as well stick with it. Ask them questions – even if you’re worried that they’re stupid questions. Listen to what they suggest or offer, but don’t make immediate decisions. Do the same for any other loans and finance agreements you have.
Once you have gathered information about all them, sit down and work out what’s likely to be the best choice for you. Everyone’s situation is different, so what works best for you might not be the same thing as what works best for others. Stay cool and look at all your options, and you’ll work out the best path (or least-worst path) for your needs.
If you’d like to hear more tips and advice on car finance and the coronavirus pandemic, have a listen to my podcast on BBC Radio 4’s Money Box programme.
