Millions of UK residents are now struggling with the economic fallout of COVID-19 and are beginning to ask themselves the same question: how will they make the payments to their credit cards, personal loans, car finance agreements and mortgages at the end of this month?
However, an answer has now been provided by the Financial Conduct Authority (FCA) with new guidance being issued to all banks and consumer credit companies. The FCA has informed them that in relation to overdrafts, credit cards and personal loans, they must provide customers with breathing space and ensure they can obtain payment breaks without damaging their credit rating.
Why has the FCA decided to act?
With it now being estimated that over one million people have claimed Universal Credit and other social security benefits in the last few weeks, the effect of the UK Government’s lockdown on the British economy is quickly tightening the purse strings for many UK families.
Families who previously thought they could rely on a wage at the end of the month, are now worrying when they will next get paid: whether that’s from the Department of Works and Pensions or the UK Government’s Job Retention Scheme for employee’s, who have been furloughed by their employers.
However, in response, the FCA has now issued guidance to banks and finance companies explaining to them that they are expected:
- To offer three-month payment breaks to customers with loans and credit cards, who have been negatively affected by the COVID-19 Crisis;
- To allow customers who have arranged overdrafts, up to three months interest-free on the first £500; and
- To ensure no customer is negatively impacted because of the recent changes to overdraft fees, that were only introduced this month.
In addition to this, they have also issued an instruction to lenders that a customer’s credit reference score should not be negatively affected if they request a payment break.
Interest and fees
However, the FCA has cautioned consumers they should only request a payment break if they require it, and where they can still make their normal payments, they should make it as normal, as interest and fees will not be automatically frozen. This means debts could, therefore, increase if someone obtains a payment break.
This is not to say, however, that some lenders may not agree to freeze interest on a case to case basis, as the FCA has also made it clear to lenders that the measures outlined are not the only ones that lenders can offer their customers.
Lenders are also still required to treat customers fairly, so where someone’s circumstances require further flexibility, lenders are required to do consider this.
The elephant in the room
However, the Financial Conduct Authority has not applied the guidance to all financial products; and has not applied it to car finance agreements, such as Hire Purchase, Conditional Sale and Personal Contract Purchases (PCP). They have also not applied it to payday loans.
Despite this many car finance firms are offering payment breaks for borrowers of up to two months if they can show they have been adversely affected by the crisis. Some are going further and freezing interest and charges during the payment break period.
Speaking about car finance industry, James Jones an expert from credit reference agency, Experian, said: “car finance is the elephant in the room at the moment, although all lenders have to treat customers fairly”. Some lenders, he said are “proactively contacting customers to help”.
It is believed the Financial Conduct Authority is working on guidance for car finance lenders and will issue this in the coming weeks.
What should you do if you require a payment break?
The important thing about payment breaks are they must be agreed to by lenders and you cannot just miss a payment. If you do, this will likely be recorded as a missed payment and your credit rating may be adversely affected. You also may have charges applied to your account.
However, many consumers are struggling to contact their lenders who are trying to deal with high levels of enquiries and their own staff shortages. They are, therefore, telling customers to visit their websites and to make applications for payment breaks online.
