Distressed payday loan and auto finance borrowers have been offered up to three months of payment vacation if their finances have been affected due to the coronavirus.
The Financial Conduct Authority (FCA) today confirmed a series of proposals first announced this month, including freezing payments and interest, to ensure borrowers are treated fairly.
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The following is confirmed:
- Payday loan clients should be offered a month’s interest and a payment freeze
- Borrowers with other high-cost types of credit, such as buy it now, pay later, pawn shops, and lease-to-buy agreements, should be offered payment breaks of up to up to three months.
- Auto finance borrowers should be offered repayment holidays of up to three months
The measures will enter into force from April 27, 2020.
Businesses are not required to follow the measures, but the FCA says it expects it and adds that it can take enforcement action if they don’t treat customers fairly.
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He also points out that lenders can go above and beyond, including offering longer payment freezes where appropriate.
Customers who complain about non-compliance with the rules by lenders will still have the right to complain first to the company concerned and then to the Financial Ombudsman Service as usual.
Christopher Woolard, Acting CEO of FCA, said: “We have been working quickly to introduce temporary financial relief tailored to a range of specific credit products.
“Many companies are already working with their customers, but these measures ensure that all consumers affected by the coronavirus emergency can request a temporary freeze on their payments. “
Here is what the regulator proposed in more detail.
One month payment and interest freeze for payday loans
For high-cost, short-term loans, such as payday loans, the FCA says companies should provide a one-month payment and interest freeze to customers facing payment difficulties due to the pandemic. coronavirus.
He says offering a freeze of just one month both reflects the shorter duration of most loans and prevents businesses from accumulating additional interest during the freeze.
After the freeze, companies should make it possible for borrowers to repay their loans affordably.
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The FCA says it could be a single payment at the end of the term or a number of smaller payments.
He adds that companies should also consider whether other options are more suitable and use existing measures called “forbearance” on a case-by-case basis if the customer is expected to be in financial difficulty for more than a month.
Forbearance measures include the suspension, reduction, waiver or cancellation of interest or additional charges, postponement of payment of arrears, or acceptance of token payments for a reasonable period of time.
But James Jones, a consumer expert at credit reference agency Experian, warns, “You must confirm an agreement with your lender before stopping any payment, such as canceling direct debits.
“Unless you have an agreement in place, unauthorized missed payments can result in penalties and are likely to affect your chances of getting credit in the future.”
Three-month payment freeze for lease with option to buy, buy it now, on-payment, and pawnshop agreements
For borrowers with rent to own, buy now, pay later, or a pawn shop, companies must offer a three-month payment freeze to troubled customers.
With rent to own, where borrowers pay monthly fees for household items such as televisions and refrigerators, the FCA says businesses should not repossess property used during the payment freeze.
When it comes to buying now and paying later, the FCA says customers during a promotional period, such as the first three months without interest, should be granted a three-month extension.
In addition, pawn shops should extend the repayment period for the three-month freeze period or, if the repayment period has already ended, agree not to serve notice of sale of an item that has been put. pledged for this period.
Pawn shops are also expected to suspend planned sales of consumer items during any payment freeze.
During repayment periods, borrowers are generally entitled to recover their property from pawn shops if they repay the loans in full, plus interest.
FCA adds that while social distancing means that pawn shops and rental companies per se are unable to redeem, collect or repossess property, they shouldn’t pass on any additional fees or charges. on borrowers.
But he points out that businesses will be able to continue charging interest while payments are frozen for these three types of loans – unless a customer needs additional assistance.
In this scenario, lenders can use existing measures on a case-by-case basis, including the ability for the company to suspend, reduce, waive or waive any other interest or charges, defer payment of arrears, or accept nominal payments for a reasonable period of time.
If a customer is unable to resume making payments at the end of a deferred payment period, they should contact their lender.
The FCA says companies should work with customers to resolve these difficulties before payments are missed.
Three-month payment freeze for auto finance borrowers
Here, the FCA expects companies to offer a three-month payment freeze to customers who have temporary difficulty meeting finance or lease payments due to coronavirus.
He adds that companies shouldn’t end agreements or repossess vehicles if borrowers are having trouble and still need to use their cars.
The FCA adds that companies should not change customer contracts unfairly.
For example, they should not try to use the temporary drops in car prices caused by the coronavirus situation to recalculate the personal contract purchase lump sum (PCP) payments at the end of the term.
Lump sum payments are an additional amount that auto finance borrowers can pay at the end of their contract if they wish to purchase the car from the dealership.
Additionally, when a customer wants to keep their vehicle at the end of their PCP contract but doesn’t have the cash to cover the lump sum payment, the FCA says companies should work with customers to find a solution.
He adds that refinancing the lump sum payment might “not be appropriate” in the circumstances.
James Fairclough, CEO of AA Cars, points out that distressed borrowers need to get in touch.
He said: “It is important to note that lenders will not automatically make special arrangements.
Drivers are responsible for contacting their lender before they encounter any difficulties.
“Call centers are understandably busy these days, but there are many providers who offer payment holiday request forms online. “
Is there any other help available?
The move follows measures announced by the regulator earlier this month for lenders to offer temporary payment freezes on personal loans and credit cards for up to three months.
Banks have also been encouraged to cede up to £ 500 in interest-free overdrafts and ensure borrowers are not stung by high overdraft interest rates.
The government has also asked mortgage lenders to offer three-month payment holidays.
But the regulator had been criticized for leaving out high-cost credit and auto finance borrowers, who until now had to negotiate the aid themselves on a case-by-case basis.