Car finance, payday lenders warned on payments during Covid crisis

Payday lenders and car financing firms were warned by Britain's financial regulator to ease off customers struggling to make payments amid the Covid-19 pandemic.

The Financial Conduct Authority said it wanted to see payment holidays implemented and gave lenders until Monday to respond as it accelerated the usual consultation process.

“The short timescale for this work is in recognition of the significant impact coronavirus is having on consumers' finances right now,” the FCA said on Friday.

Measures would also cover pawnbrokers, rent-to-own (RTO) and buy-now-pay-later (BNPL). The FCA said it wanted motor finance firms to freeze payments for three months and payday lenders one month.

RTO and BNPL customers would receive a three month holiday under the proposals. Loan and credit card repayments were also last week suspended for the same amount of time.

"We are very aware of the continued struggle people are facing as a result of the pandemic," said FCA interim chief executive, Christopher Woolard.

"These measures build on the interventions we announced last week and will provide much-needed relief to consumers during these difficult times."

The FCA expected to finalise proposals by 24 April, "with them coming into force shortly afterwards".

“If a payment freeze isn’t in the customer’s interests, firms should offer an alternative solution, potentially including the waiving of interest and charges or rescheduling the term of the loan,” it added.

Car finance firms were told not to “change customer contracts in a way that is unfair”, such as using the temporary depreciation of car prices caused by the coronavirus crisis to recalculate personal contract purchase (PCP) balloon payments at the end of term.

“Where a customer wishes to keep their vehicle at the end of their PCP agreement, but does not have the cash to cover the balloon payment due to coronavirus-related financial difficulties, firms should work with the customer to find an appropriate solution,” the FCA said.

Payday borrowers would also be insulated against any extra interest payments accrued during the one-month freeze.

“After the end of the freeze, the firm should allow the consumer to pay the deferred payment in an affordable way – whether for example, by one single payment after the end of the term or by a number of smaller instalments,” the regulator added.

“High-cost-short-term-lenders are also reminded, like all lenders, to consider whether immediate formal forbearance may be more suitable if a customer was already in financial difficulty before the impact of coronavirus.”

Hargreaves Lansdown personal finance analyst Sarah Coles, personal finance analyst said the wait for an announcement had been "agonising for people trying to juggle expensive debts while dealing with low and falling incomes".

She warned that the one month freeze on payday loan repayments would "offer a little breathing space and is far better than nothing, but for many people it won’t be nearly enough to help them make ends meet".

"Unfortunately, the FCA has struggled to solve the problem of payday loans. It’s caught between a rock and a hard place. If it forced a three month payment freeze and let interest build up, the bills would be impossibly huge. Meanwhile, if it forced a three-month interest-free payment freeze, it could put these companies out of business and people would end up at the mercy of informal and unregulated forms of debt," she said.