Can I Take A Payment Holiday On My Car Finance?
Under normal circumstances, there is no definitive answer to whether you can take a payment holiday on your car finance. In almost all cases, speaking to your finance provider is the best course of action as they will try to assist you in making the repayments – in the best possible way for both parties.
A car finance payment holiday is essentially a one-month break from your repayments. They usually occur when you are struggling to make the repayment that month and need to defer the payment so that you can stay on top of other necessities.
It is important to remember that you will be expected to make up for your missed payment and this is often done using one of two methods:
You can choose to split the missed payment over your remaining months and stick to the original end date. This will increase your monthly payments to cover the month you missed.
Alternatively, you can keep your monthly payments the same and just add your missed payment to the end of your contract, extending the car finance agreement by one month. The caveat with this is that it will likely cause your monthly payments to increase slightly because the car will lose additional value over that extra month, and you will be expected to cover for that loss if you keep the car for the extended period.
Who is eligible for a car finance payment holiday?
The problem with car finance payment holidays is that it is not an exact science. There is no clause in a finance agreement that stipulates eligibility for a payment holiday. It is generally done on a case by case basis.
So if you do find yourself in a position whereby you need to take a payment holiday, the first thing you need to do is contact your provider – that way you can find out whether or not you may be eligible.
Which finance options offer payment holidays?
Car finance payment holidays are quite rare, but there are cases within every finance option whereby somebody has needed a payment holiday and the provider has agreed to a more manageable payment plan.
So, whether your finance is a lease, Personal Contract Purchase (PCP), Hire Purchase (HP) or personal bank loan – we urge you to get in touch with your provider and discuss your options with them at the soonest possible time.
What will I need to provide before being approved for a car finance payment holiday?
As a car finance payment holiday is usually only accepted when absolutely necessary – it is likely the finance providers will need to assess your case based on some affordability tests. For this they may ask for proof of your income and outgoings so be prepared to provide any documents that they can use to assess your case.
Will a car finance payment holiday affect my credit score?
When you take a car finance payment holiday, it won’t appear on your credit report and shouldn’t affect your credit score. Only missed payments would be reported by a lender to credit reference agencies.
A car finance payment holiday taken out before 31 March 2021 might not affect your credit score thanks to government intervention that has been implemented to help people struggling due to the coronavirus pandemic.
Is there an alternative option?
If you are struggling to make your repayments and aren’t completely sold on the idea of a payment holiday, you do have some alternative options.
If you have paid off 50% or more of your total PCP or HP loan value, you can opt for something called early termination. You will have to hand your car back immediately and you will face no additional charges, providing you have stayed within the pre-agreed mileage limit and the car is in good condition.
Terminating your lease agreement is a slightly different process that incurs more costs than other methods of financing. Finance providers will charge around 50% of your total outstanding balance, plus an additional early termination fee that could be as much as £600. You can however choose to do this at any point during the lease, without having to wait until you have paid over half of the value.
Alternatively, you could speak to your finance provider and discuss possible refinancing options. This isn’t too dissimilar to a payment holiday, except you won’t actually defer any payments – just rearrange them to become more manageable. This will involve extending the period of the loan to make the monthly payments smaller.
Again, it is worth noting that this will increase the interest costs and you may have to cover the additional value of the car that is lost over the extended period. You may also still have to hand the car back on the original date.
Will I be charged for taking a car finance payment holiday?
In almost all cases you won’t be charged a fee for taking a car finance payment holiday, but you will face additional costs throughout the remainder of the contract.
As we’ve mentioned, your missed payment will either be split between your remaining months, or added to the end. This will increase the interest because you are essentially borrowing more for a little bit longer. All providers have to make the re-structured payments clear when discussing your payment holiday with you though – so you won’t be stung by nasty, unexpected costs.
The other long term ‘cost’ to consider is your credit rating. A car finance payment holiday will show up on your credit report and will be taken into account by future credit providers. So if you plan on taking out car finance in the future or other forms of loans, you may find yourself having to pay a higher rate of interest because of it.
For more information on car finance and leasing, check out our handy guides page.