What is a Car Finance Payment Holiday?
Are you struggling to meet your car finance payments because of the COVID-19 pandemic? Don't worry! We have good news for you, and some advice about the process of requesting your payment holiday. These can be worrying times if you're struggling to pay back your loan, but trust us when we say that lenders are here to support you if you need it (and they're really nice people when you talk to them 😊)
You can now request an initial or further payment from your lender. The Financial Conduct Authority (FCA) in the U.K. has extended the car finance payment holiday period to 31 March 2021. You need to apply for a payment holiday by 31 March 2021 and all payment holidays must end by 31 July 2021.
If you wonder whether you are eligible for this plan and how it works, let's break it down for you.
How Does A Car Finance Payment Holiday Work?
the payment holiday is to allow you to skip monthly payments temporarily. This period will give you time, especially if you are struggling to pay due to unexpected circumstances.
Also known as the payment freeze, it is essential to note that the car finance payment holiday extension period does not come for free. It's just a temporary measure, and you will need to up your payments in the future to meet the difference.
If you were worried that the firm will repossess your car, relax, you are eligible to apply for a deferral as long as it does not exceed six months.
How Do I Get a Payment Holiday?
With all types of financial planning and borrowing, you may be significantly concerned about your credit score. If this is you, it's good to understand the step-by-step process of setting up a payment holiday for car finance. Here’s what you need to do:
Contact Your Firm
Whether you need a 3-month payment holiday for car finance or a 6 months deferral, you must let your lender know.
Explain Your Challenges
If you lost your job or source of income, let your car firm know that it’s tough to keep up with the payments. With this, they can decide to either give you a payment holiday or an alternative schedule, such as reduced payments, until you get back on your feet.
Understand the Terms and Conditions
Times have been demanding since the outbreak of coronavirus in 2020. Because of this, At this stage, the lender considers how much cash you have paid already, history in making payments, the amount to be covered during the payment holiday, and increments on your monthly repayments after the payment holiday is over.
Before committing to this, make sure the firm briefs you on all the details and consequences of skipping payments. You don’t want to ruin your credit score.
Keep in Touch Constantly
In the case that your financial situation changes or worsens, your lender should also be in the loop. Missing payments without notifying the firm can cause your problems, and you could quickly lose your car. Make a point to discuss your options frequently until your cash flow situation stabilises.
What Happens After Your Payment Holiday Ends?
Borrowers can have their car finance payment holiday extended up to 6 months and even longer, depending on the lender's agreement. But what happens after this period is over?
The most important thing to note is that after the car finance payment holiday is over, your accrued interest could be higher than before. This increment depends on how much time is left on your agreement.
Your monthly repayments will pick up immediately. However, if you cannot make the regular payments, contact your lending firm to discuss your options. With the car finance holiday extension during COVID 19, borrowers on their first payment holiday are lucky as they can apply for a second one.
At the end of a payment holiday, if you can afford to meet the balance, it’s best to do so. This is the only way to reduce the extra amount and interest accrued during the payment freeze.
What Are the Alternatives to a Payment Holiday?
The coronavirus pandemic prompted the taking up of more measures to support borrowers struggling to make payments. However, this relief has also been extended to vulnerable customers who encounter all types of financial challenges. If you are not eligible for a payment holiday, here are some alternatives your lending partner can provide:
The company could offer you the option to pay interest only without the regular monthly repayment amount. This system provides short-term relief until you can resume making the required payments.
The importance of discussing your situation with your lending firm is crucial for your repayment plan. It's possible to lower your monthly contribution or cut it into half to an amount you can afford for a few months.
Shorter Payment Holiday
A standard car finance holiday period is 3 or 6 months. The lender can opt to give you a shorter period, let's say two months or a month, to allow you to get some cash for further payments.
In the U.K., some lending firms have payment systems that don't cater to zero payments. In this case, you will be charged a token of £1 instead of the total cost. With this system, you will still need to pay the increased interest and repayments amount after your car finance holiday U.K. comes to an end.
Forbearance is a lender's last resort. This option is for individuals who are in too much debt and can't even afford to meet their daily basic living costs.
If you are in deep financial trouble, the firm will most likely suspend the payments or waive some of the debt to help you survive. The downside to this is that your credit history will take a significant hit, making it hard for you to borrow cash in the future.
With the rising effects of the coronavirus pandemic, the car finance payment holiday is here to stay. If you are struggling financially, you should contact your lender immediately to discuss your options to avoid car repossession or negative credit history.
The regulations by the FCA protect consumers from unfair practices in the U.K. Furthermore, firms have to support customers by reducing or freezing payments to a level they can afford. You should take advantage of the payment holiday extension if you need any assistance.