People struggling to repay debts during the coronavirus pandemic have been given a temporary reprieve.
Support for credit card, personal loan and car finance customers was due to end on October 31, however the Financial Conduct Authority, the City watchdog, has said help will be extended.
Here’s what is available and the loopholes to be aware of.
Credit cards and personal loans
People with outstanding credit card bills or personal loans will be able to freeze payments for up to six months. This will be available both to people who have already requested a payment holiday and those who are doing so for the first time. The FCA has not yet said whether delaying repayments will affect your credit score.
Borrowers should only take up support if they really need it, the regulator said.
Sarah Coles of Hargreaves Landsdown, the investment firm, said if you missed payments because you couldn’t get hold of your bank in time to arrange a freeze, your credit rating would not be damaged either. “Where interest is frozen on credit cards, people wouldn’t usually be able to use those cards. That will not apply in this case and people can continue to spend,” Ms Coles added.
What are the loopholes?
Nick Hill of the Money & Pensions Service, an official source of free advice, said people should consider these options before they took on additional high-cost credit but should check what the longer term implications were before making any decisions.
People who take a holiday from loan or credit card repayments will still be charged interest during that time, meaning the amount they have to pay back at the end will be higher.
You must make sure to get a formal agreement with your provider before you skip a payment otherwise it could be considered a default and your credit score will be affected. You can find more info about how to take a payment holiday correctly here.
Car loans, buy-now-pay-later and payday loans
Help is also available for customers struggling with motor finance agreements, repayment schemes with shops and short-term credit such as payday loans.
Firms offering car finance or buy-now-pay-later schemes are also providing up to six month payment freezes. The FCA said companies should not use the situation to change customer contracts unfairly.
People on high-cost short-term credit, including payday loans, will be able to delay repayments for a month if they have not already done so.
In most cases, apart from payday loans, customers will be charged interest during any payment holiday.
If customers are still struggling at the end of the three months, they can ask to extend the payment break by another three months. Those who have not yet asked for a payment freeze have until 31 October to do so.
Ms Coles said that borrowers should not just assume a payment freeze is a good idea as doing so could leave them carrying more debt than when they started.
“At the end of the freeze, if they have to ask their lender for more help, it would start to damage their credit record: in the interim the missed interest payments would have built up even more debt. They’d be far better having those conversations now, and avoiding the extra interest,” she said.
Who will be left out?
So far no help has been promised for those struggling to pay back peer-to-peer loans. Anyone concerned about their situation should contact the Money Advice Service, part of the Money & Pensions Service.
Are you struggling with a car finance or buy-now-pay-later scheme? Get in touch by emailing marianna.hun[email protected]