Paying for things on finance can often make life a little more manageable, especially with the cost of living stretching the limits of your cash a little further than you may like.
Sometimes though, even paying on finance with affordable monthly payments can push you beyond your means. Thankfully, many, if not all lenders offer payment holidays to help lessen the financial burden you may be encountering during a short period.
A concern for many though is whether doing so will harm your credit score and potentially disrupt your chances of securing future finance should it ever be needed. In this edition of our blog, we look at whether payment holidays on your car finance agreement will affect your credit score.
A car finance payment holiday is a short break from your regular payment schedule and can help you get finances back in order should you have difficulty making payments. A payment holiday for car finance must be agreed with the car finance companies in advance and could see interest continually accruing whilst the payment break is in place. Therefore, opting for a payment holiday should be given a lot of thought.
Payment holidays show on your credit report and could negatively affect your credit score. You should also be aware that whilst this payment holiday can give you a temporary respite from monthly payments, when they restart you could be paying more than before for a few months at least.
In many cases, lenders will offer a payment holiday of three months, but this can vary between lenders quite significantly. In some cases, car finance payment holidays can be as long as a year.
Payment holidays for car finance or any other kind of loan agreement are commonly used when the finances may be a little more stretched than normal. Common reasons people enquire about a car finance payment holiday would include:
The acceptance criteria can vary per lender, so it would always be worth checking in advance before assuming you will be granted a payment holiday. You should also bear in mind that payment holidays are only short-term. Therefore, if your change in circumstances has led to a permanent decrease in your income, you should speak to your lender to arrange a new agreement so that you don’t fall further behind.
As recently as 2020/21, certain payment holidays were not having any effect on a credit score. The damage Covid-19 caused to wages meant that those on finance agreements could ask for a payment holiday and see no change made to the credit file. Things are now back to as close to normal as we can expect though, and requesting a car finance payment holiday will be noted on your credit file regardless of the reasons for needing one.
Any form of break in your finance agreement, whether it be a payment holiday, a late payment or an underpayment will be shown on your credit file, and as a result, be seen by other lenders. This can then bring down your credit score and make you less appealing to certain lenders. However, should you have not fallen into arrears before requesting the holiday and fulfilled the obligations of the agreement after your holiday, you may see no change in your ability to apply for finance in the future.
You should always check with your lender though, as some agreements may have particular terms in place relating to payment holidays and how they could affect your credit score.
Ultimately, it is a personal choice. If you find that the repayments on your car are likely to be temporarily unaffordable but you know things will return to normal shortly, a finance payment holiday could be a good solution. You will just need to factor in that interest may still accrue during the time of your payment break and make the initial months of the resumed agreement much more expensive.
Furthermore, you are breaking a financial agreement so the impact on your credit score could be detrimental to further finance you require in the future.
You should also note that if your finance agreement had a promotional interest rate or a special offer, taking a payment holiday could see this offer revoked and you paying back the remainder of the loan at a higher rate of interest.
There are a few different options to consider before asking your lender for a payment holiday and your current and future circumstances can be a good indicator of which you should take.
Opting for a car finance payment holiday can be a good way to help you get your finances back on track. However, the potential for it to harm your credit score could make future finance harder to come by. In addition, the interest you accrue during the holiday, or the increased monthly payments you may encounter, could see you spending beyond your means more than you had anticipated. Ultimately, it is a conversation for you to have with your lender and see what works best for you now and in the future. If you are seeking affordable car finance, speak to the team at Euphoria. We act as direct lenders meaning we can help you find the car you want much more easily. Whether it be a used car on finance, or a brand new car on finance, and whether you have a stellar credit rating, or need car finance for poor credit score, our team are on hand to assist. Contact us today.