What's a payment holiday?

Life can be unpredictable, and when you sign up for a car finance agreement for three years or more, you’ve got no way of knowing what’s around the corner. If your circumstances change and your finances come under some extra pressure - maybe due to one of life’s inevitable curveballs like a family emergency or losing your job - you could suddenly find it harder to make your car finance payments. 

If this happens to you, you might be able to take a payment holiday. It’s not quite as relaxing as a week’s all-inclusive in Greece, but it can give you some breathing space to get your finances back on track.

What is a payment holiday and how does it work?

A payment holiday is when you take a break from paying your car finance payments for a little while. It’s an arrangement you agree with your lender (so please don’t just stop paying without speaking to them first!) for a temporary, agreed period.

With a payment holiday, you skip your normal car finance payments for a time - maybe a few months even - but you’ll still have to pay the balance in the future. You’ll also still be charged interest for the time you’re ‘on holiday’ so to speak.

If you’re struggling to make your regular payments, talk to your lender. They’ll discuss your options with you, and agree on a plan that suits your specific needs. Whatever you do, don’t just stop paying - this will only make your financial situation worse in the long run. Your lender will have ways they can help you, so make sure you talk to them if things are getting tight.

What are the pros and cons of a payment holiday?

A payment holiday can be a lifeline if you’re going through a rough patch with your finances - but here are some things to consider before you go for it:

Pros of a payment holiday

• It relieves pressure - having an agreed break from your car finance repayments can ease the pressure on your budget if you’re struggling financially
• It’s flexible - freeing up the money you’d usually spend on your car finance repayments can put some flexibility into your finances, and give you a chance to get back on top of things

Cons of a payment holiday

• You’ll still be charged interest - even though you won’t have to make your usual repayments during your payment holiday, you’ll still be charged interest for that period, and this will be added to the total balance you need to repay
• It’s a short-term solution - by definition, a payment holiday is a short-term measure, so if your financial woes are likely to last a long while, there may be better solutions
• It can affect your credit score - taking a payment holiday will usually show up on your credit report, which means it could affect your credit score

What are the eligibility criteria for a payment holiday?

There are no hard and fast eligibility criteria for taking a payment holiday. All lenders will have their own policies and criteria for payment holidays, so it depends on what your individual finance company says.

To find out if you’re likely to get approved for a payment holiday, get in touch with your lender and let them know what’s going on. Explain why you’re finding it hard to pay on time, and how a payment holiday could help. They’ll also want to know when you think you’ll be able to start making your payments again.

What will I need to provide before being approved?

A payment holiday is something you have to apply for, rather than a straight-up entitlement, so the lender will need a fair bit of information from you so they can decide whether to go ahead. They might ask to see your recent bank statements, proof of your income, and learn a bit about any major outgoings.

Do payment holidays count as arrears?

Being ‘in arrears’ on a loan means that you’ve missed some repayments, so you haven’t repaid as much as you agreed to, and you owe the lender money. 

A payment holiday is a bit different, as it’s an agreed temporary arrangement with your lender. But, during your payment holiday, you might see an ‘arrears’ on your credit report, as you’re technically behind on what you’ve been contracted to pay.

What are the alternatives to a payment holiday?

When you speak to your lender about your situation, they might suggest some other options that could work better for you, rather than a payment holiday. These could include:

• Lower payments - there are a few different ways to reduce your monthly repayments, so it’s worth checking out all your options before you decide what to do
• Shorter break - if you know your financial troubles are short-term, you might only need a short break from your payments, like for just one month
• Only paying the interest - some lenders might offer you the option of just paying the interest on that monthly payment, rather than the full repayment amount
• Token payment - some systems don’t allow for zero-cost payments, so you might have to pay a token amount of £1 a month for your payment holiday
• Voluntary termination - if your circumstances are changing for the foreseeable future, and it’s going to be hard to keep up with your repayments for a while, then you might want to think about ending your car finance agreement early with voluntary termination. To exercise this legal right to hand the car back and exit your agreement early, you’ll need to have paid off – or be prepared to pay -  50% of your total balance already. It is important to note you will still be responsible for any arrears (missed payments) before the termination. Additional charges may apply if the car is damaged beyond normal wear and tear.

Managing your finances after a payment holiday

After your payment holiday is over, you might find that your monthly payments have gone up. This will be because you’re still charged interest for the months when you’re on a break, and that interest gets added to your total balance. If you’re still working towards the same end date as before, your repayments will likely be higher to include the extra interest. 

But, if you’ve extended your contract by the same amount of time as you took your payment holiday, the repayments should be a similar amount.

Your lender should discuss this with you when you get in touch with them to talk about your situation. Taking a break to help you out during a tight few months is one thing, but you need to make sure you and your lender are clear on what happens after the holiday, too. If you’re going to be looking at higher repayments, make sure you have room for this in your budget.