Borrowers of £48billion in car finance will be able to freeze their payments for three months if they are struggling to cover their installments due to coronavirus, the Financial Conduct Authority proposed today.
The city regulator said those who used Personal Contract Purchase, Hire Purchase or Conditional Sale agreements to purchase a car would be able to temporarily put payments on hold without lenders ending agreements or repossessing cars.
Around nine in 10 new cars in Britain were bought on finance in the 12 months to February, while the Finance and Leasing Association, which represents car finance lenders, said the number of calls from concerned customers rose 1,400 per cent in the first week after Britain went into lockdown.
Motorists with financed cars will be able to take a three-month payment holiday if they are struggling to pay their bills, the FCA said today
Its most recent figures found 170,283 new and used cars were bought on finance in February.
Although this was a 1 per cent drop on February 2019 figures, it shows consumers were taking out car finance agreements just a month before Britain went into lockdown due to the coronavirus outbreak.
The announcement from the FCA follows similar moves to allow mortgage, loan and credit card borrowers to put temporarily pause their repayments if they’re struggling with their finances.
However, payments are not written off and will be recalculated, meaning borrowers who take a payment holiday would end up making slightly larger monthly repayments once the holiday ends.
Lloyds Banking Group, which provides car finance through Black Horse, said it had already given payment holidays to more than 50,000 customers.
Before the FCA’s intervention today, lenders were able to choose whether to provide payment holidays on a case-by-case basis.
Adrian Dally, head of motor finance at the FLA, said: ‘The proposals announced by the FCA broadly mirror the forbearance measures that motor finance lenders have been providing to their customers over recent weeks.
‘During this unprecedented period, every lender has recognised that forbearance is a vital bridge for customers whose income has been disrupted, and the industry has committed significant resource, human and financial, to meeting requests for support.’
Black Horse – owned by Lloyds Banking Group – said it had already provided more than 50,000 payment holidays to its car finance customers
The FLA previously told This is Money: ‘If you are a customer suffering financial difficulties or anticipating payment problems because of coronavirus, do get in touch with your lender as soon as possible.
‘The solutions involved will vary from lender to lender and customer to customer, but they’re there to help, and will find an answer that best suits your circumstances.’
The FCA also said firms ‘should not change customer contracts in a way that is unfair.
‘For example, firms should not try to use temporary depreciation of car prices caused by the coronavirus situation to recalculate PCP balloon payments at the end of the term.’
The balloon payment is what it costs a borrower to own the car outright at the end of the PCP term and is based on the value of the car at the end of the contract based on motorists’ annual mileage.
Holders of PCP contracts alternatively have the option of handing back the keys or switching to a new car, using the value left in their current car as a deposit for a different one.
The FCA added: ‘Where a customer wishes to keep their vehicle at the end of their PCP agreement but does not have the cash to cover the balloon payment due to coronavirus-related financial difficulties, firms should work with the customer to find an appropriate solution.’
Regulators also followed up last week’s measures for those struggling with unsecured credit with new proposals for payday loan customers.
Payday lenders would be expected to provide a one-month interest-free payment freeze.
It said: ‘This shorter period reflects both the much shorter length of most loans and, given interest rates tend to be higher than for other high cost credit products, prevents firms from accruing additional interest during the freeze period.
‘After the end of the freeze, the firm should allow the consumer to pay the deferred payment in an affordable way – whether for example, by 1 single payment after the end of the term or by a number of smaller instalments.’
The proposals have been sent to lenders for a quick consultation. Responses are required by Monday, with a view to introducing these latest measures next Friday.
>> Read This is Money’s previously published guide on what to do if you think you could be struggling with car finance payments
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