The FCA has an issued guidance effective 27 April 2020 that essentially says customers experiencing financial difficulties due to Coronavirus can request a Payment Deferral for 3 months—and that firms should grant customers the payment deferral unless they decide that it is "obviously not in the customer's interests" to grant it. Here's how it works.
Who does this guidance apply to?
This FCA guidance applies to firms that issue regulated motor finance agreements for consumers (not businesses), such as:
- Hire purchase agreements (e.g., personal contract purchase (PCP) agreements)
- Personal contract hire (PCH)
- Conditional sale agreements
- Other debtor-creditor-supplier agreements
How will it help consumers?
The guidance is meant to provide consumers with temporary but immediate support if they're having trouble making car finance payments due to Coronavirus. The first option is a 3-month payment deferral, but the guidance lists other options that might be suitable as well—if a firm decides that a 3 month payment deferral is not suitable given the customer's situation (e.g., it's not in the customer's "best interests"). Here are the options:
- Payment deferral (3 months): The first measure to help if a customer is having temporary payment difficulties due to Coronavirus, a payment deferral mean you don't make payments for a period of time and during that time you are not considered to be in arrears.
- Payment deferral (less than 3 months): e.g., if the loss of income is for less than 3 months
- Reduced payments: e.g., if the loss of income is only partial
- Rescheduled term: e.g., extending the term of the loan which reduces monthly payment (but can mean higher overall interest charges)
How does a deferred payment work?
A Payment Deferral
means that you make no payments for a set period of time—without being "in arrears."
Deferred payments are typically added on to the end of your repayment period, extending the length of your agreement by, in this case, 3 months. Interest charges keep accruing for those extra months, which means that you'll end up paying a lot more than each deferred payment in the end. So a payment deferral can lead to difficulties such as a higher debt burden in the end.
A deferred payment might not mean a £0 payment. Some company's systems won't allow for a "zero" payment without causing a glitch; in this case you may be asked to make a payment of under £1 to avoid system errors.
Will I be charged a fee for payment deferral?
No, you should not be charged a fee for taking a payment deferral or another solution.
You will be charged interest during this period, however. Firms are allowed to continue charging interest during a payment deferral. This means at the end of the deferral period you'd owe more in interest payments and your balance would increase.
Will the Payment Deferral affect my credit rating?
The Payment Deferral itself should not affect your credit rating—it means that you make no payments for a set time without being "in arrears." However, if additional forbearance is required (e.g., waived interest and charges), then these would be reported on your credit file and could negatively affect your credit rating.
How do I apply?
Contact your lender to request a payment deferral before 26 July 2020. If you are granted a deferral it will usually be for 3 months from the time it is granted, so your deferral period could extend beyond 26 July 2020.
It's possible that the FCA will extend this deadline.
PCP balloon payments
The guidance further suggests that in cases where a PCP reaches the end of its term between 27 April and 26 July 2020, firms should work with customers who want to keep their car but cannot make the balloon payment due to Coronavirus, to find a fair outcome.
If a customer wants to return the vehicle at the end of the contract but cannot do so due to the Coronavirus situation, they should be aware that they are unable to continue using the vehicle after the contract expires.
Is this guidance enough for consumers?
We asked StepChange, the UK's leading debt charity, what they think about the new FCA guidance. Richard Lane, Director of External Affairs at StepChange, said:
"The proposed new measures on car finance fill some of the gaps that were left in the previous approach required by the FCA to firms' offering of forbearance to people suffering loss of income due to the pandemic.
"What is becoming urgent is to gain some understanding of what lenders will do at the end of the initial forbearance period—we think it is unlikely that most people whose income has been affected will be fully back on their feet and able to resume normal payments plus repayment of the sums accumulated during the forbearance period by that time. It's likely that forbearance periods will need to be extended."
StepChange has further advice on debt help during Coronavirus here.