Struggling motorists should get an extra three-month break from paying their car finance bills, industry experts said, after mortgage holidays were extended to protect borrowers from mass defaults.
It is feared that drivers suffering severe hardship as the coronavirus lockdown wrecks the economy could become unable to keep up payments and lose their cars within weeks unless urgent action is taken. A meltdown would hit lenders hard and flood the market with a wave of cheap second-hand vehicles.
The Finance & Leasing Association said motor finance division members had received an estimated 482,000 requests for relief on car loans so far.
In the eight weeks ending May 1, FLA members had received an estimated 1,243,000 requests for Covid-19 related forbearance from customers, 82pc of which had been granted by that date.
The calls for more support came as the Financial Conduct Authority watchdog (FCA) extended a holiday period on mortgages for another three months.
Andrew Burn, an automotive expert at consultant KPMG, warned against repossessing vehicles as ministers seek to limit the number of people using public transport because of coronavirus. He added that repossessions would also hammer the UK’s already stricken car industry.
Mr Burn said: “The last thing wanted is a load of repossessed vehicles coming back into the market, vehicles appearing just as the manufacturers are trying to start production.”
The FCA announced in April that drivers with car finance deals could apply for a three-month break from repayments if they were struggling financially because of coronavirus, copying a similar scheme for home loans.
Many customers who are paying for their car through monthly installments have lost their jobs or been furloughed, making it impossible to keep up with bills.
Regulators declined to comment on whether a vehicle loan holiday extension is also in the works.
Justin Modray, of consumer group Candid Money, said: “Forbearance should be extended as for most people a car is their second-biggest debt after housing. On that basis it’s in the Government’s interest to keep the country solvent in these difficult times.
"Extending payment holidays on car finance seems sensible because otherwise people could be left high and dry.”
James Daley, of Fairer Finance, said not offering further relief could even harm lenders.
He said: “It is in most lenders’ interest to extend holidays whether they are required to or not by regulators. Repossessing lots of cars at this point does not make much sense for lenders – there’s no demand for cars at the moment so they would struggle to sell them and bake in their losses.”
But the Finance and Leasing Association (FLA) is against a further extension on vehicle loans. Its members arrange £48bn of car financing deals a year.
Adrian Dally, the FLA’s head of motor finance, said: “With more parts of the economy due to reopen during June and July, the best solution by far would be to help those customers returning to work to transition to regular repayments.”
The trade group is thought to be worried about extending relief for people who are likely to lose their jobs as a result of the pandemic. It is concerned that any further forbearance will only add to their financial burden, as interest will keep building up on car finance deals while payment holidays are in place.
This means that if a borrower does default, they will face an even bigger debt.
The FCA’s mortgage holiday extension comes after 1.8m people asked for breaks when payment breaks were made available at the start of the crisis.
Under the extended forbearance announced on Friday, those who have not yet taken a mortgage holiday will be able to apply for one until October 31.
However, homeowners will be contacted by their bank to encourage them to restart payments if they are able to afford it. Customers will be also offered the chance to make partial payments.
There are warnings that taking an extended break from mortgage repayments could have negative consequences for consumers in the long run, and there is a growing concern about the way homeowners could become reliant on mortgage holidays.
When a customer takes a payment break, interest continues to build up on the loan, meaning that the homeowner will pay back more in the long run.
A report by Telegraph Money showed that taking a three-month payment holiday could cost homeowners £2,000 over their mortgage term.
Banks have agreed that payment holidays will not have a negative impact on the credit scores used by banks to decide whether to lend. However, the FCA has warned consumers that credit files are only one tool used by lenders. Repeatedly being unable to make payments could lead to banks turning down future applications.
This trend has already started, with mortgage approvals falling to a seven-year low in March.
As part of an effort to ensure that no one is made homeless during the crisis, the current ban on repossessions of homes has been extended to October 31.
If customers miss mortgage repayments later this year, the Bank of England has told banks to make "well-balanced and consistent decisions" that take into account the information they have about the borrower, the impact of Covid-19 and the support already provided.
It urged lenders to take a proportionate approach when assessing how likely a customer is to repay what they owe and whether their earnings will rise again in future, for example after a temporary pay cut.
Lenders were last week racing to get City rules around mortgages changed ahead of an expected spike in Britons facing bankruptcy once government support and payment holidays are lifted.
Stephen Jones, head of bank lobby group UK Finance, said debt advice charities had warned lenders that more than three million people will need further support when the holiday periods end.
One option tabled with the FCA last week included tweaking so-called mortgage conduct of business rules to make sure customers have more flexibility during this crisis – for example, by allowing lower payments each month.
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Ian Gordon, a banks analyst at Investec, said that ultimate losses for banks from payment holidays are still likely to be low but the extension could pus up costs. UK banks already face a £25bn hit in loan losses this year due to the pandemic.
City minister John Glen said: “We’re doing everything we can to help people with their finances at this difficult time, and that includes making sure people get the support they need with their mortgages. That’s why we’re working with the banks and lenders to extend payment holidays if people need them.
“Everyone’s circumstances will be different, so when homeowners can pay some or all of their mortgage, they should work with their lender on a plan; but if they are still struggling, I want them to know that help is there.”