Does taking a car finance payment holiday affect your credit score?
You might want to take a car finance payment holiday if you're unable to make your payment this month – but will this impact your credit?
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Loan repayment holidays
Payment holidays (also known as ‘repayment holidays’) can be a helpful option if you’re struggling to pay off your car finance on a short-term basis.
If something has cropped up and you know that you won’t be able to pay your full finance payment this month, your lender might be able to grant you a payment holiday.
Payment holidays usually appear on your credit report, and this could negatively affect your credit rating.
What is a car finance payment holiday?
A car finance payment holiday is a short break from the car finance repayment schedule you agreed to upon taking out the finance.
When you’re taking a payment holiday, you won’t be required to pay your usual car finance.
You might be granted a payment holiday by your car finance provider if you get in touch and let it know you’re struggling to make your payments.
This is suitable in situations where you’re unable to pay in the short term, such as if another unexpected bill has cropped up, or you’ve become unemployed.
While taking a payment holiday, you’ll usually still gather interest on your car finance loan which may be added to your balance.
You can learn more in our car finance repayment holiday guide or talk to your lender to see how it’s able to help.
Will car finance payment holidays cause bad credit?
Taking a car finance payment holiday will likely affect your credit score and could cause you to have poor credit.
Your payment holiday will usually show up on your credit report, so other lenders will be able to see that you’ve needed to pause payments if they carry out a credit check.
If you don’t want your credit report to be negatively affected by a payment holiday, there are other options to consider.
It’s worth chatting with your lender about early termination if you’re having long-term financial issues and have paid more than 50% of the balance, or asking whether there may be refinancing options.
An ‘arrangement flag’ may also appear on your report for up to three years after your contract ends.
While taking your payment break, you may see an ‘arrears’ on your credit report as you’ll be behind on what you’ve been contracted to pay for. This could happen if you’re paying below the minimum payment set out in your finance agreement.
Remember – If you took a finance payment holiday due to the COVID-19 pandemic (between 17 March 2020 and 31 July 2021) this won’t appear on your credit report and will not impact your credit score.
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The risks of a car finance payment holiday
Even if a payment holiday is the best option set out by your lender, it’s important to consider that even in these circumstances, car finance payment holidays do come with drawbacks.
Taking a car finance payment holiday can negatively affect your credit rating and will show up to lenders on your credit report. This can make it harder to get approved for more finance in the future.
Taking a payment holiday on one of your finance accounts doesn’t mean you’ll automatically be taking a break from all of them – don’t get caught out by this!
If you need payment holidays from more than one finance account or loan, you’ll need to contact each lender individually. There might be better alternatives in this case, depending on your circumstances.
If you have a 0% deal with your car finance lender, it might revoke this as a condition of your payment holiday. Again, this is down to your circumstances and will need to be discussed with your lender.
When taking a payment holiday, you’ll usually still be charged interest, and this will be added to your balance. Depending on the lender and your circumstances, this might mean that your monthly payments will increase slightly once you restart payments.
Alternatives to payment holidays
A car finance payment holiday might not be the best option in all circumstances, and you might also be turned down for one by your lender. There are other options to investigate.
Voluntary termination
If you’ve already paid off more than 50% of your Personal Contract Purchase or Hire Purchase car finance, you’re able to voluntarily terminate your finance agreement and hand back the car.
If your car only has minor damage in line with fair wear and tear and hasn’t exceeded your mileage allowance, this should be easy. Otherwise, you might be charged for repairs and excess mileage.
Speak with your lender to find out the details – this may be a better option if you are likely to struggle with payments in the long term.
Reduced finance payments
If you choose to speak to your lender about car finance payment holidays, it will give you ‘tailored support’ based on your circumstances.
This might include reducing your monthly payment amount, but this can also show up on your credit report and affect your credit rating.
If you’re paying less than your original minimum payment set out in your contract, this is when arrears might appear on your credit report.
Refinancing
If you’re having long-term struggles with paying your car finance, you might be able to refinance with different loan terms.
This could include a longer loan period with smaller monthly payments or a lower-interest finance deal.
This isn’t always possible, so do your research and chat with your lender before going ahead.
I can’t pay my car finance – what next?
If you’re in a situation where you can’t afford your car finance payments, the first thing you need to do is talk to your lender. It can offer tailored support on how to navigate the situation.
The worst thing you can do in this situation is to ignore it and not highlight your issue to the lender. Missing car finance payments without informing it of your financial struggles can hurt your credit score and can eventually result in the lender taking back the car.
If you’re struggling with money and keeping up with payments, you can get free and confidential help from StepChange, Citizens Advice, and National Debtline.