23/04/2020

Payment breaks for car finance and high-cost credit agreements

23/04/2020

Payment breaks for car finance and high-cost credit agreements

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The Financial Conduct Authority (FCA), the UK’s financial regulator, intends to issue new guidance tomorrow (April 24) that it hopes will provide further assistance to those who are struggling with the financial consequences of the COVID-19 crisis.

Following on from their guidance, issued only a few weeks ago, that concerned personal loans and overdrafts, the FCA has now indicated it will issue further guidance to car finance firms and high-cost lenders.

What is the FCA proposing for car finance firms?

The guidance that is being proposed for car finance firms covers hire purchase, conditional sale and Personal Contract Purchase agreements (PCP) and requires those firms to offer customers, who are struggling with their car finance payments, up to three months payment breaks.

With up to 90% of all new cars in recent years been understood to have been bought using car finance agreements, it is anticipated the new guidance will come as a huge relief for many who are worrying about how they will make their payments in coming months.

The Regulator will also warn lenders that they should not use the crisis as an opportunity to change contracts in a way that will be detrimental to a customer’s interests. So, where the value of a car drops, the firms should not increase the lump sum owed at the end of the agreement.

Equally, the FCA is expected to tell firms that if customers want to keep the car at the end of an agreement, but cannot afford to make any lump sum payment that is due, they should work with the customer to allow them more time to make the payment.

The FCA is also expected to tell firms that they should not be repossessing cars during the crisis.

Payday loans

With Payday loans, which are notorious for charging high levels of interest, the FCA is expected to tell them also to issue payment breaks, but only for a month, rather than three months. The shorter period is believed to reflect the fact that most of these loans are usually only taken out for a shorter period, and to prevent interest and charges on the loans increasing more than is necessary.

After the payment break, the FCA has said the firms must allow people to repay the loans in a way that is affordable, whether that is by making one payment to clear the balance or through several smaller installments.

Other credit agreements

The guidance is also expected to cover several other types of credit agreements, such as right to own agreements, buy now pay later plans and pawnbroker agreements.

Rent to own

In relation to rent to own agreements, which are usually for household items, such as TVs and washing machines, and allow the customer to buy items over time, the FCA has said these Firms should also be prepared to give three-month payment breaks where people are experiencing financial difficulties.

Buy now pay later

The guidance is also expected to apply to those who provide buy now pay later agreements. Where the customer is still in the promotional period and is not required to pay anything, the firms should consider extending the non-payment period as part of the payment break.

Pawnbrokers

With pawnbrokers, it is believed the FCA will advise that in addition to offering a three-month payment break, they should also not sell any item that has been deposited with them as security for the loan. Equally, where someone is not able to collect an item, due to social distancing rules, the FCA will warn them not to sell any item that has been pledged in security for a loan.

Interest and charges

It is not anticipated the FCA will order firms to freeze interest and charges during the payment period, so any consumer who is thinking of applying for a payment break should consider whether they need to make an application or not, as the amount owed may increase during that period.

However, firms should, also, as a matter of course treat customers fairly and consider, when allowing a payment break, whether additional forbearance, such as the freezing of interest and charges, is also appropriate.

How do I apply for a payment break?

The important thing that must be remembered with a payment break is they must be agreed beforehand with the lender and if a payment is just missed, it will not be considered a payment break, but a missed payment. This is likely to affect people’s credit rating.

To apply for a payment break, customers should contact the lender, although most lenders are now including forms on their websites, so customers can contact them without having to phone in.

If you are struggling financially because of the COVID-19 crisis, free advice is available from a Carrington Dean advisor by calling 0808 253 3464.

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