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Payment arrangements: should you take one and what happens next

Our real money correspondent, Laura Whateley explains what you should consider when taking on or extending a payment arrangement

The offer of a holiday from repaying your bills for a few months sounds great, right? Not least at a time when extra cash in the savings pot could help cushion you against a dreaded second wave of Coronavirus and further lockdowns. 

The government announced that people affected by Coronavirus have the opportunity to pause or reduce payments on their mortgages, personal loans, credit cards car finance or bank overdrafts. This was introduced in March as a way to help us all through unexpectedly straitened times and is currently running until the end of October.

But just because we can, should we automatically choose to take a break from our financial commitments?  Could it prove an expensive decision in the long run? Or is it best to take a break where it’s given?

Here’s what you need to know to weigh up the benefits and longer-term effects of payment holidays.

If you are already on a payment arrangement and your situation has changed

At the beginning of the pandemic it was unclear how our finances would be impacted, and for many it still is. But some workers who took a payment holiday in March are now heading back to work, or reaching the end of furlough, so may find that they are in a better position to restart payments. And, if you can now afford to start repaying towards your debt, it’s best to do so.

If you don’t feel able to return to full payments, agreeing to new reduced payments will at least enable you to clear some of the balance, meaning arrears won’t mount as fast.

Contact your lender

Most lenders will contact you when you are near the end of your current arrangement, but if this doesn’t happen, it’s best to approach them to discuss your next steps. Many have set up dedicated phone lines or online forms.

Zopa, for example, is getting in touch with customers before their payment arrangement ends to agree together what happens next. It has a budget tracker at budget.zopa.com to help you understand your incomings and outgoings in detail and an online form to report your circumstances.

Think through your options

Most lenders have several options open to you, which might include a reduced payment plan or payment freeze, but these will vary by lender so ask what they can do.

If lockdown has given you breathing space to save more than expected, you might decide to both restart your payments and immediately make up any that you have missed. This is a smart move if you can afford it. Interest on loans that you’ve put on pause is not automatically wiped, which means you’ll probably have to find a way to meet what could be higher bills. The quicker you clear an outstanding balance or interest, the less it will cost you.

If you have not taken a payment arrangement yet, but you are now in financial difficulty

Sadly, there are going to be many people facing redundancy and uncertainty following the end of the furlough scheme. If this is you, and you are concerned about how to pay your bills, you can now ask for a payment arrangement on most borrowing products for up to three months from the point at which you ask, until 31st October.

This is the case even if you didn’t need to enter a payment arrangement in the spring.

How payment arrangements work for different products

Again, I’ll emphasize that payment arrangements don’t mean that you will have all your interest wiped, though your payments will be either reduced or you won’t have to pay anything while you have put things on ice. How you end up paying for the interest accrued will vary depending on what kind of debt you have – is it a credit card bill, or a mortgage? It will also vary depending on who your loan is with.

For example, with a mortgage, you might find that your monthly repayments rise slightly when you do start repaying your mortgage as normal, or the term of your home loan will be extended, which means you’ll pay more for longer.

Given your mortgage is likely to be a very large sum of money, this may be reasonably negligible, a few hundred pounds, and worth it for the breathing room. However,  taking a holiday will work out more expensive than not taking one. Online calculators can help you see how much taking a mortgage holiday will set you back over the longer term.

Always speak to your lender

Make sure you proactively contact your lender to ask for a payment freeze or reduction, don’t just stop paying what’s due. If you haven’t actually requested a payment arrangement, it will be recorded as a default, which will damage your credit file.

If it looks like a pause on repayments will push a customer into financial difficulty your lender can refuse to offer one. But in that situation, they should offer a different kind of help, such as waiving fees or interest. 

Overdrafts

Most current account providers are now offering the first £500 of an agreed overdraft interest-free if you are struggling with the financial effects of the coronavirus. If this hasn’t automatically been applied to your account, then you can ask your bank. Again, you’ll need to reapply after the three months is up, and this “offer” is available until the end of October.

If you are on a payment arrangement and your situation remains the same as March

If you have been taking a break from payments and still don’t feel you can afford to restart them in full, speak to your lender before the initial payment arrangement ends. Don’t just assume you can carry on as things are.

You can only take a payment holiday or freeze for up to three months at a time, though you can of course ask for less. If you’ve already had three months, you’ll need to sign up for another break.

It may be worth negotiating with your lender to pay a reduced amount. This allows you to chip away at your debts but in a way that’s more affordable right now. Experts will always advise that it’s better to pay if and what you can to reduce your overall debt.

If you’ve bought a car with finance you can pause repayments for up to three months, too. If you are unable to continue to make any payments, it’s worth knowing that current guidance states that your car cannot be repossessed until after 31st October at the earliest. 

How payment arrangements affect your ability to borrow

Whatever your situation, it’s important you understand what a payment arrangement means for your ability to borrow in future. 

The Financial Conduct Authority guidance has stated that any repayments missed during a Coronavirus arrangement should not be reported to the three credit reference agencies in the UK – Experian, Equifax and TransUnion. And all these agencies have made it clear that these arrangements will not be recorded on your credit file.

That does not mean, however, that taking one won’t have any negative effect on your future ability to borrow.

When deciding whether to offer a loan or mortgage, lenders will look at your credit file – including your credit score – but they will also look at other factors – like the last time you made a payment towards an outstanding debt or whether your debts have reduced overall in the last few months.

Lenders have a responsibility to consider whether or not a potential borrower can afford to take on further debt, and therefore may well worry that, if you have taken a payment arrangement this year, it is not wise for you to borrow even more money.

You could therefore find that taking a break from payments now might damage your personal finances in years to come.

If you have no choice but to go on a payment arrangement, do your utmost to keep the best credit profile that you can. For example, make sure that all three credit reference agencies have your full address and up to date details. Make sure you are registered on the electoral roll. If there are any mistakes on your credit file you can ask to add a notice of correction. Also make sure you are not still associated financially to any ex partners or ex flatmates with whom you once shared joint financial products that are no longer needed.

Debt help

If you are really struggling and worried about money that you owe, never bury your head in the sand. The longer you avoid the problem, the more it will grow. The smartest thing is to confront the issue sooner rather than later, or when payment holiday schemes come to an end and you’re left wondering how to meet new, potentially higher, repayments. 

The charity StepChange offers brilliant, anonymous advice for those worried about their debts, either online or by calling free on 0800 138 1111, with online guides to how to manage your money as best you can if you’ve been affected by the pandemic. 

Laura Whateley is a freelance writer and author of Sunday Times bestselling book Money: a user’s guide. She has written for a wide variety of publications including The Times, The Guardian, Grazia, Refinery 29, Elle and Stylist Magazine. All views are her own.