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Car Finance Payment Break – Simple Guide, FAQs & More

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Scott Nelson

Managing Director

MoneyNerd’s founder, Scott Nelson, has a decade of financial industry experience, including 6 years in FCA regulated loan and credit card companies. Troubled by a lack of conscience in the industry, he founded MoneyNerd to give genuine advice to those in debt and struggling financially.

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Janine Marsh

Financial Expert

Janine Marsh is an award-winning presenter and a valuable member of the MoneyNerd team. With a wealth of experience as a financial expert, she's been featured on BBC Radio 4, BBC Local Radio, and BBC Five Live, and is a regular on Co-op Radio.

Learn more about Janine
· Jan 16th, 2024
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Car Finance Payment Break

For free & impartial money advice you can visit MoneyHelper. We work with The Debt Advice Service who provide information about your options. This isn’t a full fact-find, some debt solutions may not be suitable in all circumstances, ongoing fees might apply & your credit rating may be affected.

Understanding car finance payments can be tough. If you’re wondering about taking a break from these payments, you’re in the right place. Each month, more than 170,000 people visit our site looking for guidance on money matters.

In this simple guide, we’ll explain:

  •  What a car finance payment break is
  •  How to ask for a payment break
  •  Who should think about a car finance break
  •  What other options you have
  •  How a payment break might affect your credit score

It’s normal to worry about making car finance payments; the fear of losing your car can be really hard, and car finance contracts can be very puzzling.

We are here to help you understand your choices and find a way out. Let’s get started.

Could you legally write off some debt?

There are several debt solutions in the UK, choosing the right one for you could write off some of your unaffordable debt, but the wrong one may be expensive and drawn out.

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What is a vehicle payment holiday?

A vehicle repayment holiday is a break from any financing agreement payments you have to pay for a vehicle. The dealer or financing company will agree not to collect payments for so many weeks or months, but any interest during that time may still accumulate for you to repay later. 

A payment deferral of this kind may extend your payment term. 

Payment holidays can be used if you have a temporary reduce in income, but know that you will be able to cover the costs in the next few months. This is the case for this forum user.

The most common type of contract is a Hire Purchase Agreement, where you make monthly payments to lease a vehicle for many months or years and then own the car outright when the payment term ends. 

But there are other types of contracts that may include a balloon payment, which is a much larger payment at the end of the contract to make you the legal owner of the car. 

Is it the same as a car finance freeze?

The same process is also known as a car repayment/finance freeze. It is another term for the same process. 

Who should consider a car finance break?

Payment breaks are beneficial to people who are experiencing short-term financial difficulty, such as those affected by coronavirus or health issues reducing their income for a short period. You may look at this option if you lose your job, are currently receiving Universal Credit or you are facing vehicle repossession further down the line.

If you are not sure if your income will be affected for a long time, a vehicle payment freeze may not be the best option. But there are alternative options available including getting out of a car finance agreement, which I discuss towards the end of our guide. 

How a debt solution could help

Some debt solutions can:

  1. Stop nasty calls from creditors
  2. Freeze interest and charges
  3. Reduce your monthly payments

A few debt solutions can even result in writing off some of your debt.

Here’s an example:


Situation

Monthly income £2,504
Monthly expenses £2,345
Total debt £32,049

Monthly debt repayments

Before £587
After £158

£429 reduction in monthly payments

If you want to learn what debt solutions are available to you, click the button below to get started.

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Do creditors have to give you a payment break?

In normal circumstances, there is no obligation for a dealership or financing business to provide you with a break from payments. 

However, the Financial Conduct Authority (FCA) and related industry bodies encourage these companies to be considerate of people’s circumstances and payment difficulties. 

Some will allow you to have at least one payment break without too much trouble. When you apply, the lender is likely to want to see evidence of any financial hardship. You could support your request with a monthly budget. 

Working out your budget

To work out an accurate budget, we have made things easier in our budgeting 101 guide. Check this guide out now and access many other budgeting resources and templates to support your payment freeze request.

Special FCA rules due to COVID-19

During the height of the COVID 19 pandemic, lenders were asked to agree to a payment freeze to help people overcome financial difficulty and uncertainty. 

The deadline to apply for these freezes passed on 31 March 2021. You still may be able to extend an existing COVID-19 car repayment holiday.

The BBC reported serious delays to these types of repayment holiday requests during the coronavirus pandemic. 

How do I request a car finance payment holiday?

If you think that you need a payment holiday, you will need to follow the following steps. Keep in mind that this is a general guide and that the specific process that you will need to follow depends on your lender.

  1. Contact your car finance provider to request a repayment holiday.
  2. Tell them about your financial difficulties or your reasons for requesting a payment holiday. You can explain why you think that a payment holiday would help. You can even include a copy of your budget as evidence as to why you will be able to afford to resume repayments in a few months.
  3. Make sure your lender tells you about any consequences of a payment holiday so you know all of the T&Cs associated with your account. You need to make sure that you are aware of any effects that a credit holiday will have on your credit score.
  4. Stay in contact with your car finance provider, especially if your financial situation doesn’t improve. Missing payments will be visible on your credit file and have a negative impact but you may be able to negotiate an alternative repayment plan.

Are there alternatives to payment holidays?

Yes, there are alternatives to payment holidays. These include:

  • Lower payments: your lender may be able to lower your monthly payments.
  • Short payment breaks: you might be able to take a single payment break if you know that your financial issues will be over in a few weeks.
  • Interest-only payments: you might be able to pay the interest that you owe on your monthly payment, rather than the whole payment amount.
  • Token payment: you may not be able to make a zero-cost payment and keep your contract. In these situations, you may have to pay a token amount which can be as little as £1. You may need to make these token payments even during an agreed payment holiday.
  • Voluntary termination: if you know that you will not be able to make any more car payments, you could look into a voluntary termination. You can only apply for this if you have paid at least half of the total value of your contract or be able to make up the difference.

How can I ask to freeze car finance payments?

Please contact your vehicle financing provider to ask for a car repayment break. You may want to do this over the phone first and then put it in writing if you are not given the answer – or a definitive answer – on the call. 

Make sure to state your financial difficulty and how a repayment holiday would benefit you. And remember to disclose your budget for evidence.

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Will a car repayment break affect your credit score?

Taking a break from repayments will not have an adverse impact on your credit file. Lenders will be able to see from your credit file that you took a payment break.

If you were to miss your monthly payments, this would have a negative effect and may prevent you from accessing capital in the future, including loans credit, credit cards or even opening a new type of bank account.  

In one way, payment breaks can protect your credit file. 

Would voluntary termination be a better option?

Voluntarily terminating the contract may be a more suitable option for some customers. If you delay repayments while interest is accumulating, and you know you still won’t be able to repay after the repayments freeze, you may be better off terminating the contract.

Under the Consumer Credit Act Section 99, you are permitted to end the agreement early and return the car. But be aware that you may have to pay more to do so.

Most agreements state that you should have paid 50% of the value of the financing contract, which includes the capital and any associated fees.

If you decide to give the car back, you should take lots of photos of the vehicle to prove its condition when you gave it back. Ending the contract in this way is known to cost the dealership or financier, and thus, they are known to try and recover some of that money by claiming damage, such as scratches and scuffs. 

Handing back the keys

When customers have to give back the car, they may be asked to drive it to a nearby destination. They cannot request you take it to somewhere unreasonable, usually determined as more than 30 minutes away from your home. 

The finance provider may decide to come and pick the car up directly from your home. They are allowed to do this but they must not charge any fees for doing so. It is their car and their responsibility to cover the costs associated with picking it up. 

There will not be any legal repercussions if you don’t make payments as part of an agreed payment holiday.

If you realise that you can’t afford to pay your car finance anymore, you should tell the car finance company. In some situations, you might be able to negotiate an alternative payment plan. You should not just stop making your payments.

You may even be able to voluntarily surrender your car, depending on the type of contract that you have. If you are unsure, you can read your contract or contact your car finance company to find out. 

If you do nothing, you run the risk of your car being repossessed.

You will get a reminder after you miss the first payment. You may get a second reminder if you miss another payment or you can be sent a notice of arrears. This arrears notice will tell you how much you owe and when you need to pay it. 

If you do nothing and stay in arrears, your car finance company can send a default notice which will give you 14 days to pay off all the debt in full. If you don’t pay off the balance, your car agreement can be ended and your car repossessed.

The car finance company has the legal right to repossess your car if you don’t pay them back.

Can I hide my car from repossession?

No, hiding your car if you know it is going to be repossessed is a crime. This crime is called concealment per the laws on repossession. 

Asking for a settlement figure

Another option is to ask the finance business for a settlement figure, i.e. how much you would need to pay to cancel the contract and own the car. Once you own the car you could legally sell it.

Whether this is worthwhile will depend on your specific situation and the equity in the car. 

Could you legally write off some debt?

Answer below to get started.

How much debt do you have?

This isn’t a full fact find. MoneyNerd doesn’t give advice. We work with The Debt Advice Service who provide information about your options.

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The authors
Scott Nelson Profile Picture
Author
MoneyNerd’s founder, Scott Nelson, has a decade of financial industry experience, including 6 years in FCA regulated loan and credit card companies. Troubled by a lack of conscience in the industry, he founded MoneyNerd to give genuine advice to those in debt and struggling financially.
Janine Marsh Profile Picture
Debt Expert
Janine Marsh is an award-winning presenter and a valuable member of the MoneyNerd team. With a wealth of experience as a financial expert, she's been featured on BBC Radio 4, BBC Local Radio, and BBC Five Live, and is a regular on Co-op Radio.