Many households are having to endure significant changes to their personal finances in recent weeks due to the Covid-19 pandemic.
The introduction of incentives such as mortgage payment holidays have eased some of the pressure on families’ shrinking budgets, but what about motorists who might be struggling to pay monthly fees for their vehicles?
With around nine in 10 new cars in Britain acquired using some form of finance, the coronavirus outbreak will be causing concern for many drivers.
Here’s what those with financed or leased vehicles need to know…
Tell your finance provider straight away
Some £48billion of finance for new and used cars was agreed with consumers last year alone.
That means there are plenty of drivers who, as a result of the coronavirus lockdowns, recently been laid off, put on furloughed or lower pay who will be worrying about how to cover the cost of their car loans.
The Money Advice Service says: ‘If you’re going to struggle to meet your repayments because of coronavirus, talk to the car finance company as soon as you can.
‘They might offer to extend the cost of the contract which would lower your monthly payments or come to another arrangement to help you out.’
The Finance and Leasing Association says: ‘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 – but to help them help you, please use online forms and emails where possible as call levels are very high at the moment.
‘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 Financial Conduct Authority also has very tough rules in place to ensure customers are treated fairly and drivers can contact the Financial Ombudsman Service for advice or guidance for how to make a formal complaint.
Doing so might produce a better result as well as protect credit files in the future.
You could be eligible for a finance payment holiday or contract extension
With vehicle purchases generally being a household’s second largest outgoing behind mortgages and rent, vehicle finance providers have anticipated that consumers will now face difficulties covering their monthly fees and have plans in place to help.
An increasing number of lenders are now offering payment holidays – similar to mortgage holidays – or contract extensions.
This will allow drivers to temporarily stop their monthly car finance payments over a specific period during the pandemic.
At the end of the payment holiday, the finance company will recalculate the remaining monthly payments – increasingly them slightly – to cover the cost of the unpaid fees during the period nothing was paid.
If you have a new car on Personal Contract Purchase or Hire Purchase it’s very likely that your provider is a finance arm of the vehicle’s manufacturer.
Early reports show that manufacturers already have measures in place to help these drivers.
Volkswagen, for instance, says that UK customers facing financial difficulties could be eligible for up to 60 days of payment holiday on their finance.
Alternatively, the German brand is also offering an extension of a repayment plan to reduce monthly outgoings.
According to research by Parkers, Ford – the UK’s biggest car seller – is also planning to offer extended payment arrangements or finance holidays to customers and has also hinted at temporarily cancelling late fees.
Sister brands Hyundai and Kia are also looking at offering payment holidays.
You can find out what each brand has said in Parkers’ online guide,
If you agree to defer payments your credit file will remain unaffected and in some cases you will incur no additional costs or fees but be prepared to pay the interest on the missing payments.
We’ve provided expert advice for each of the different types of motor finance below:
What to do if you’ve taken out a loan to buy a new or used car
If you’ve taken out an unsecured loan it will not specifically be tied to the car and it’s not unusual for banks, building societies and other lenders to offer a holiday period at the start of the loan or at any time throughout the loan period if you run into difficulties.
Motor finance expert, Graham Hill, explains: ‘Most lenders are posting advice on their websites, for example Barclays are working on a form to apply for a loan repayment holiday and Lloyds will consider applications on an individual basis but you need to contact them. HSBC says it is working on it.
‘Some, are charging interest over the payment holiday period which you will pay at the end of the agreement.
‘Others aren’t charging interest. For more details visit the website of your lender as the situation is constantly changing.’
What to do if you have the most common form of finance: PCP
If you have the most popular form of motor finance, PCP, then the advice is to contact the provider immediately to let them know you’re having difficulties covering the cost of monthly payments – as it is for all forms of finance.
PCP deals tend to have lower monthly costs, as customers are paying off the depreciation of the vehicle as they have it.
If you want to own the car outright at the end of the finance agreement, you need to cover the cost of the ‘balloon payment’ at the end of the contract – which is the pre-agreed value of the car at the end of the contract depending on your annual mileage.
Mr Hill says the big problem with PCP in this scenarios is the balloon payment.
‘If you have a three month holiday and the agreement extends from – for example – a 36 month agreement to a 39 month agreement this could well affect the resale figure at the end of the agreement and affect the monthly payments.
‘With modern computer equipment this should be reasonably easy to recalculate and I’ve heard that some providers are now allowing for agreements to be extended – so you need to talk to your specific provider.
‘As most PCP schemes are car manufacturer backed, they are likely to be as sympathetic as possible because they want you to return for future business,’ Hill adds.
What to do if you have a Hire Purchase or Conditional Sale agreement
Hill states: ‘Both operate similarly to a loan and the lenders can provide a payment holiday period but you must contact them in order to put an arrangement in place (see the recommendations for loans above).
‘Blackhorse are allowing monthly extensions, where you must contact them seven days before each payment is due.
‘They will charge the interest on missed payments at the end of the agreement.’
What if you have a Contract Hire or Personal Contract Hire agreement in place?
PCH finance plans are lease agreements – a form of long-term rental.
Hill says it isn’t usual practice for providers of these agreements to offer holiday periods but some have been known to allow it.
‘Again, unless the Government steps in and forces the banks and all other finance providers to offer a holiday period the lenders will only deal on a case by case basis.
‘Therefore, it’s important to get in touch with the provider.
‘At the moment major independent provider, LEX, is offering an email service for this. Customers need to use the subject heading ‘Payment Deferral Request’ when they get in touch.
‘VW Financial Services is currently allowing for a “60 Day Breathing Space”, which may be extendable depending on the lockdown.’
What to do if your PCP finance agreement is about to come to an end and you want to hand the car back – but the dealership is closed due to Covid-19
If you plan to hand your financed vehicle back at the end of a PCP agreement but the dealer you received the car from is closed, you need to contact your lender to find out what you need to do with the motor.
In some cases this might mean being allowed to keep it a little longer, as there is no means of the dealership taking it back – but you must contact your finance provider for confirmation of next steps.
Alternatively, if you plan to pay the balloon payment and keep the vehicle, this can be done without having to visit the dealership.
In fact, you would have had to inform your dealer beforehand that you intend to keep the car and funds can be transferred online.
Can I terminate my finance agreement early if I’ve lost my job?
Yes. It’s called a Voluntary Termination, but you can only do this if you’ve paid off half of what you owe on the car.
This is why it is rarely a benefit for those on PCP agreements, because the bulk of the vehicle’s value is weighed towards the end of the term in the balloon payment.
For instance, customers with PCP deals who are two years into a four-year agreement are highly unlikely to have paid off half the value of the car.
A voluntary termination – leaving you with nothing else to pay – is legally allowed under the 1974 Consumer Credit Act. However, it does mean you need to return the car.
If you’re voluntarily terminating for the first time, it should not impact your credit rating.
A voluntary termination should not be confused with a ‘voluntary surrender’, which should be avoided.