Dear Anna, I’ve lost my job because of coronavirus and money is really tight. As well as my credit card, I have a car I’m paying off. A friend mentioned I can freeze my monthly payments. Surely there’s a catch?
Thanks for getting in touch. Your friend is right. But I’d offer a note of caution: A payment freeze is only for short-term relief and could result in higher costs later on. Let me explain…
In April the banking watchdog, the Financial Conduct Authority (FCA), introduced measures for people facing money problems due to coronavirus. People with personal loans (including from Amigo and legal doorstep lenders), credit cards, store cards or outstanding catalogue payments, can ask for a freeze for three months.
We might not have to pay anything at all (or a very small amount) for three months, but it depends on the company lending you the money. It won’t affect our credit file for the period of the payment freeze but interest will continue to build. This means we’ll pay higher costs in the long term. So, unless we have no other option, it’s worth trying to avoid going down this path.
The FCA later extended these measures. They now cover motor finance (including hire purchase and leasing agreements), high-cost credit (payday loans), rent-to-own, buy-now-pay-later and pawn-broking.
Those who bought a car on finance and are struggling to pay for it can apply for a payment freeze. The FCA says car firms should treat customers fairly, even if the value of the car decreases. It expects them not to charge more for ongoing payments. Some drivers might reach the end of the purchase agreement period and want to keep the car. The FCA expects more to be done to support for them if they don’t have the cash to hand to pay it off.
It is worth noting that none of these measures prevent lenders from continuing to charge interest. (This is different for payday loans – see FCA website for more info). If a payment freeze isn’t in our best interests, the lender may refuse to offer it.
Coronavirus may lead to longer-term cash flow problems for many of us. The advice is always that we should speak to our lender as soon as possible, online or over the phone. They may be able to offer other options. For example, the FCA is encouraging firms to consider suspending, reducing or even cancelling further interest charges. They might also accept smaller payments for a longer period of time.
It is important we don’t cancel or reduce payments until we have spoken to the lender.
For all the information on the new measures, including credit cards, car finance and pay day loans, check out the FCA website page here.
As coronavirus has hit you right in the pocket, money-wise, you should review all your finances, Mike. Take the Quids in! Future Proof Finance Quiz and it will give you a checklist of the steps you might want to follow.
I hope this helps and best of luck!