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Do Car Finance Payment Holidays Affect Your Credit Score?

Posted on 4th January 2024
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Do Car Finance Payment Holidays Affect Your Credit Score?

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.

What is a car finance payment holiday?

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.

How long does a car finance payment holiday last?

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.

Why would you need a car finance payment holiday?

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:

  • Redundancy
  • Unexpected bills
  • Altered working hours
  • Maternity/paternity leave
  • Sickness

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.

Will taking a car finance payment holiday affect my credit score?

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.

Is taking a payment holiday on my car finance a good idea?

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.

Are there alternative options to car finance payment holidays?

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.

  • Ask friends or family for help. This may be something that makes you a little uncomfortable but if you are happy to ask, and they are happy to lend, you can continue to make the payments when they are needed. This stops your credit agreement from being broken, stops the additional interest accruing and keeps your credit score as it was.
  • Voluntary termination. This can be a good option when you have made more than 50% of your PCP or HP for your car. You can terminate the agreement and return the car without any negative effect on your credit score. As long as the car meets the fair wear and tear criteria of the lender, there won’t be any additional fees either. This can be a worthwhile option if finances are likely to be compromised for a long period of time, but you should check with the lender in advance.
  • Refinancing. Just like with other forms of finance, you can speak to the lender about changing your loan terms. This could mean you are given longer to pay it off with smaller monthly outgoings. This could mean a higher interest rate though so you may end up paying more overall.
  • Reduced payments may sound appealing, but they can show as arrears on your credit file. The lender may offer you what is known as “tailored support” where they fit the finance around your circumstances. This can mean that you pay less per month than the original minimum payment and as a result show arrears on your credit report.

 

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.

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