Relief for high-cost borrowers as new payment freeze kicks in

The UK’s financial regulator has confirmed a three-month payment freeze for those struggling to repay some of the most expensive forms of debt due to the current pandemic. It comes in response for calls to “close the gap” between protection for consumers with different types of borrowing.

Following similar moves on mortgages, credit card and overdraft debt, the Financial Conduct Authority (FCA) introduced a package of measures this week to provide further support for consumer credit customers with a three-month freeze for motor finance, buy-now-pay-later, rent-to-own and pawnbroking agreements.

The Financial Conduct Authority (FCA) will be introducing the package of measures outlined last week to support consumer credit customers facing payment difficulties due to coronavirus.

The targeted temporary measures being implemented are a three-month payment freeze for motor finance, buy-now pay-later (BNPL), rent-to-own (RTO) and pawnbroking agreements. For high-cost short term credit (including payday loans) payments will be frozen for one month with no additional interest to be charged.

“We have worked at pace to introduce temporary financial relief tailored for a range of specific credit products,” said Christopher Woolard, interim chief executive at the FCA.

“Many firms are already working with their customers, but these measures ensure all consumers affected by the coronavirus emergency can apply for a temporary freeze on their payments.”

These can be complicated finance agreements though, and while the FCA has been clear that it expects firms to “act fairly where terms are adjusted” in light of the measures, consumers are being warned to be clear about the implications of applying for such freezes as well as the steps lenders can take in response.

Motor Finance

From this week, motor finance providers will need provide a three-month payment freeze to customers who are experiencing “temporary difficulties” meeting finance or leasing payments due to coronavirus. Customers will need to actively ask for the freeze as this, like the other measures announced to help consumers deal with the financial fallout, will not be applied universally.

Firms have been warned not to take steps to end the agreement or repossess the vehicle if the customer needs use of the vehicle and, crucially, lenders may not alter Personal Contract Purchase (PCP) or Personal Contract Hire (PCH) agreements unfairly.

For example, firms can’t recalculate PCP balloon payments based on a temporary drop in car prices caused by the coronavirus situation.

And where a customer wishes to keep their vehicle at the end of their PCP agreement, but doesn’t have the cash to cover the balloon payment due to coronavirus-related payment difficulties, firms are being directed to work with the customer to find an appropriate solution.

Because of the greater risk of a difference between the balloon payment and the value of the vehicle at the moment, firms are being warned that they need to come up with solutions that could unfairly create problems for the borrower here either – such as refinancing the balloon payment.

Mark Turner, managing director within Duff & Phelps’ compliance and regulatory consulting practice said:

“It is now crucial that senior managers of motor finance firms guarantee they commence changes now, as even short delays could put customers at risk.”

“The payment holidays will come as a great relief as many customers are facing an unexpected change in circumstances.”

“However, shifting debt from consumer to businesses has the ability to create further pressure in these volatile times. As such, appropriate government support might be needed to protect consumers and businesses, to prevent creating a knock-on effect for the auto industry.”

“It is important to consider that a payment freeze might not always be the best option for everyone. Often, it might be better to pay down certain debt, for example higher cost debt, to avoid additional interest accruing which will ultimately have to be repaid.”

“While three-month payment holidays will be welcomed by many individuals in difficulty, there is a real risk that some customers who could afford to continue payments might see the saving as an opportunity to increase their spending, and find themselves in greater financial difficulty later down the line. There is no ‘one size fits all’ approach and firms need to be mindful in granting payment freezes and will need to take steps to assess each individual case on its own merits.”

We know that even after the regulator’s clamp-down on charges and rates, expensive payday loans remain a bad idea at the best of times. Some consumers believe they are the only option open to them however, and for them, the FCA has announced that high-cost short term credit providers of all types will need to offer a one-month payment freeze to those customers facing Covid-19 related cashflow problems.

The shorter period and the higher interest rates charged on these loans mean the FCA has taken the additional step to rule that no additional interest is charged to the customer as a result of the payment freeze – unlike other measures which don’t prevent interest being charged during that period.

Like all lenders, payday and other short term loan firms will also need to “engage with their customers” to understand if and when repayments will start up again, including the possibility of reverting to other established procedures – designed to help those facing problem debts more generally – to work with customers who can’t repay their loans.

“The new measures brought about today from the FCA will bring a much-needed sense of relief in a time of heightened worry for many,” says Anthony Morrow, CEO of digital financial advice service OpenMoney.

“Payday loans, along with other forms of high cost credit, have always been an incredibly risky way of lending but should be avoided now more than ever. The extortionate interest rates charged by these firms cause havoc for with those who fall under financial hardship and need an instant fix.

“With firms providing a one-month interest free payment freeze under the new FCA guidance, there is a glimmer of hope and opportunity for people to get more of a grasp on their money if they are in this situation.

“That said, it’s important to remember this is a freeze and not an eradication. The money does need to be paid back and economic conditions could worsen for people. Make sure to use this additional time to be extra vigilant with outgoings and work to build up the funds to pay off the loan.”

Rent to own (RTO), buy now pay later (BNPL) and pawnbrokers will also provide a three-month payment freeze for customers struggling financially due to Covid-19.

They will also have to extend deadlines for repayment or repossession and pawnbrokers will have to extend the redemption period for the same three month freeze period. If the redemption period is already up, they must agree not to serve notice to sell an item or suspend the sale during the freeze.

Meanwhile, if a BNPL customer is within the promotional period, firms to extend this by three months. And RTO firms will be unable to repossess goods during the guidance period.

If social distancing means that pawnbrokers and RTO firms are unable to take payment, collect or repossess goods, they should not pass on any additional charges or fees to the consumer. And if a payment freeze isn’t in the customer’s best interests, usually due to interest build up, and the remaining term of the agreement, firms should offer an alternative solution, potentially including the waiving of interest and charges or rescheduling the term of the loan.

Meanwhile, bailiffs have been banned from visiting people’s homes during the Covid-19 restrictions, though other non face-to-face actions, like phoning debtors can continue.

Anyone facing financial difficulty during the pandemic should seek support from their financial providers, such as their bank, and charities offering guidance like the Money Advice Service.

The FCA’s website provides further details of all the measures introduced to help consumers deal with the financial impact of the pandemic on their income and expenses.