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Car Finance Payment Break – Simple Guide, FAQs & More

For free and impartial money advice and guidance, visit MoneyHelper, to help you make the most of your money.

Do you want a repayment break from your car financing agreement? You may be able to ask your lender to give you some breathing space while you correct your financial situation. Avoid missed payments and damage to your credit file by communicating with your motor finance provider. 

And if you’ve been declined a repayment holiday, there are some other options at your disposal. Read on for more!

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 to not 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. 

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. 

What is the maximum payment freeze limit?

The limit for the duration of a payment freeze is set at six months. Most payment freezes last around three months. 

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. 

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 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.

How will the accrued interest be repaid?

When lenders agree to the repayment freeze, they either agree to:

  1. Stop all payments and fees
  2. Stop just the repayment capital but not the accrued interest

If the lender chooses option B, the FCA has not set down rules on how the accrued interest debt is to be repaid. They may make you pay it in one go, or they may just extend your contract.

Customers should communicate with the finance provider for details on their repayment term changes. 

Can I sell a vehicle on finance?

You may have toyed with the idea of selling the car and using the funds to pay off the contract. This is illegal because you are not the owner of the vehicle. 

Doing so is not likely to result in a custodial sentence, but you may be taken to court by the finance provider – and by the person you illegally sold the vehicle to. 

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. 

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. 

Access free tailored support from a charity!

Tackle your debts and negotiations with your vehicle finance provider with the tailored support of a debt charity. 

Charities like Step Change, the Money Advice Service or even Citizens Advice will provide further details based on your exact income and circumstances. They can offer you options and point you in the right direction. 

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