Payment freezes planned for car finance and high-cost credit customers struggling due to coronavirus
The financial regulator has proposed a new set of payment freezes for customers struggling to make payments on car finance deals, payday loans, buy-now-pay-later agreements and other credit products due to the coronavirus pandemic.
If the proposals are approved, firms will need to give a three-month payment freeze to customers who ask for one because they're struggling to make finance or leasing payments on their motor finance deals due to coronavirus –though interest will continue to rack up during the payment freeze. Lenders also won't be able to repossess those customers' vehicles.
Under the plans, customers with rent-to-own, buy-now-pay-later or pawnbroking agreements who are struggling due to coronavirus and ask for help will be given the same three-month freeze, but again, interest will accrue. Payday loan customers will get a shorter one-month interest-free payment freeze.
The Financial Conduct Authority (FCA) is now holding a rapid consultation on its proposals. The consultation will end on Monday (20 April) – it says it then expects to finalise its plans by next Friday (24 April), with the rules coming into force "shortly afterwards".
The new rules will be minimum requirements for firms – so individual lenders will still be free to offer customers more help, such as a longer payment freeze.
The proposals follow new requirements for banks to offer payment holidays on loans and credit cards, as well as interest-free overdrafts, which were approved last week.
See our Coronavirus Finance & Bills Help guide for more info on help available paying bills and debts during the coronavirus pandemic.
Martin: 'It's right that the regulator is proposing levelling things out'
Responding to today's announcement, Martin Lewis, founder of MoneySavingExpert.com, said: "The FCA is gradually ticking through the list to ensure there's some form of formal protection in all key debt sectors. Many firms, especially in the car finance sector, had already put forbearance protocols in place, such as payment holidays – but not all.
"That left a lottery over whether you get help with that. And while price differences are normally a factor of competition, a lottery of how much firms will help in extraordinary circumstances isn't.
"After all, no one chose their product based on 'how well will they behave towards me in the event of a pandemic', so it's right that the regulator is proposing levelling things out.
"While these are technically only proposals, in the past with these emergency accelerated consultations, very little actually changes before enactment, it's just a rubber-stamping exercise. This is all likely to be finalised next Friday. People who are struggling now should still speak to their lender now, but if you don't get help equal to what the regulator is proposing, then leave it until after next Friday and come back."
What help will those with car finance get?
Major car finance lenders – including, for example, Lloyds and VWFS – have already been offering options such as payment deferrals, reduced payments and payment extensions, on a case-by-case basis. But the FCA's proposals are for what you should be offered by all firms as a minimum. Here's how the new rules will work if the FCA's proposals go through:
- Lenders will have to offer three-month payment freezes to customers having temporary difficulties due to coronavirus. However, this won't be automatic, so you'll need to ask for help if you need it. Lenders will also be able to offer a payment freeze of less than three months where a three-month freeze is "not considered appropriate", though three months will be the norm.
Interest will continue to accrue on loans during any payment freeze, and in some cases the interest rate can be hefty – so only consider doing this if you really need it.
It'll be up to individual firms to decide whether your loan's term will be extended as a result of a payment freeze, or if you could be asked to make higher payments once the freeze is over. So make sure you check all the implications of taking a payment freeze before you make any decisions.
- Lenders won't be able to end a car finance agreement or repossess a vehicle if a customer's struggling to pay due to coronavirus.
If a customer isn't able to pay the larger 'balloon' payment at the end of their deal but wants to keep their vehicle, firms will be expected to "work with the customer" to find a solution.
- Lenders will be expected to treat customers fairly, and not introduce unfair changes to contracts due to the coronavirus situation. For example, if car prices depreciate temporarily due to coronavirus, firms shouldn't use this to recalculate customers' personal contract purchase balloon payments, made when a customer wants to keep the car at the end of the deal, and based on its expected value.
What about payday loans and other high-cost credit customers?
The FCA is also proposing payment freezes for customers with payday loans and other forms of high-cost credit who are struggling due to coronavirus. How this would work depends on what type of product you have.
Here's what will happen if the plans go ahead in their current form – all measures apply only to those struggling due to coronavirus who ask for help:
- Payday loan customers will be given a one-month payment freeze – and no interest will accrue during this time.
Once the freeze is over, firms will need to let customers make the deferred payment in an "affordable way", which could be as a single payment after the term ends, or as several small instalments.
- Buy-now-pay-later customers will be given a three-month payment freeze – and if a customer is within a promotional period, this should be extended by the length of the payment freeze. However, if interest is being charged it will continue to accrue during the freeze – so you'll need to weigh up carefully whether you really need to freeze payments.
- Rent-to-own customers will also be given a three-month payment freeze, and if a customer needs the goods, firms won't be able to repossess them for as long as the temporary rules are in force. But again, interest will continue to rack up during the freeze so only consider this if you really need it.
- Pawnbroking customers will be given a three-month payment freeze, and would also have their redemption period extended for this time.
If a customer's redemption period has already ended, the firm shouldn't serve notice to sell the item during the three-month freeze – and if it has already told the customer it intends to sell the item, it should pause the sale during the freeze period.
Again, interest will be charged during the payment freeze, so you'll need to consider carefully if you really need to do this.
Rent-to-own and pawnbroking firms also won't be able to charge customers additional fees if social distancing measures mean items can't be redeemed, collected or repossessed.
Who's eligible for a payment freeze?
Like last week's credit card, loan and overdraft measures, these rules would only apply for customers whose financial difficulties were caused by the coronavirus situation. You'll also need to ask for help – under the proposed new rules, payment freezes don't have to be offered automatically.
If you're already struggling financially for unrelated reasons, you could be offered other forms of 'forbearance' (tolerance and help) under existing rules – which could include reducing or cancelling interest charges, or delaying the payment of arrears.
Firms won't be expected to investigate why you're asking for a payment freeze, though they could decide not to give you one if this would clearly be against your interests.
What does the FCA say?
Christopher Woolard, interim FCA chief executive, said: "We are very aware of the continued struggle people are facing as a result of the pandemic. These measures build on the interventions we announced last week, and will provide much-needed relief to consumers during these difficult times.
"We have tailored our measures to specific products. For most of these proposals, firms and consumers should consider the amount of interest which may build up, and balance this against the need for immediate temporary support. If a payment freeze isn't in the customer's interests, firms should offer an alternative solution, potentially including the waiving of interest and charges or rescheduling the term of the loan."