Resolver blog: the devil is in the detail with payment holidays

I’ve talked a lot about customer service and company behaviour throughout the coronavirus pandemic. But one thing I have been curious about, and surprisingly haven’t seen much about, is how did consumers find taking one of those so called payment ‘holidays’?. Was it a dream holiday or a holiday from hell? 

Rather than guess, we asked you – and the results are in. Our survey of more than 900 consumers tells us that in the main, those that have taken a payment holiday or used an overdraft have reported positive experiences of communication with their lenders, many found the ability to take one helpful, and in fact, perhaps unsurprisingly, a number told us of their intention to take one going forward.

But as with everything, it wasn’t always as simple for some. The more we dug, the more we understood that while a lot has been done to facilitate these initiatives for consumers, some were not as lucky with the positive experience, and for a fair number, nuances they were unaware of or – arguably – were not hit home to them left them confused and surprised (and not in a good way). In short, the devil was in the detail.

What is a ‘payment holiday’?

Payment deferrals are not a new thing – but it’s fair to say that they have never been as high profile and, certainly at the start of the pandemic if you asked for one, you got it almost without question. 

And to that point, I’ve always been a bit uneasy with the term ‘payment holiday’ to describe what is effectively a deferral with strings.  A ‘holiday’ (remember those?) implies freedom from something and this really isn’t the case here. 

Communication is in whose interest?

Perhaps one of the more telling findings we saw from our survey was that just over a third of people were not aware that lenders were still able to charge interest on existing balances despite the physical monthly payments being authorised to stop.

We have examples in our complaints data (which we looked at alongside our survey findings) of people finding an interest charge on their statements after their three months of non-payment was ‘up’. And it was clear that the difference between ‘not paying anything for three months’ versus ‘you will incur a charge if you don’t pay anything for three months’ was not clear to too many people.

On the face of it, the statement in the case of a payment holiday that your payments are ‘stopped’ for three (or six) months is in fact correct. But it doesn’t tell the full story. What consumers have told us is that many did not understand was that this didn’t mean your interest was frozen. 

So if you had an existing balance, and your credit agreement includes an interest rate to be applied, this was still allowed to continue. To be clear, this meant that your end balance after your payment holiday could actually be higher than before it started (particularly if you had a credit card) – and if an interest rate applied and you had a balance on your agreement then by not paying this for three to six months, you were in effect incurring higher charges as you weren’t paying at least some of it off.

Many of the people we heard from who had been caught by this questioned the fairness of the practice. I think this, along with the unfortunate choice of name for the scheme, does let down what is a well intentioned measure. It should have been a lot clearer, particularly for high interest, and frankly complicated products like credit cards.

And what next?

Perhaps the most concerning point of our survey findings for me is the 53% of respondents that told us that they were at least slightly concerned about paying back their debt after their payment holiday had ended. The proportion that felt concerned was lower for those that used an overdraft – but was still a third of those respondents.

Now while this concern is not necessarily caused by the payment holiday itself (and in fact that potentially gave some respite temporarily), if you couple that with the one-third of these that told us they didn’t feel they had all options for paying back debt explained to them, I’d argue there’s more that could be done here.

This is particularly telling for those that are now facing (or have had applied) significant interest (of up to 39.9%) applied to existing overdrafts. The warning signs for this have been there and in fact this proposal was admirably shelved at the start of the pandemic in the UK. But now lenders are allowed to do this, what does that mean for those of us that have built up a significant overdraft that has been used to cover shortfalls – will they be offered a means of support rather than being dragged further into debt on something they would have found difficult to pay back immediately regardless?

In conclusion, I support anything that will give consumers much needed relief in the face of financial difficulty or might help them budget and plan for any longer term issues. But it is clear to me that some people didn’t have all the facts, and at the start of the pandemic communication perhaps wasn’t done as clear and plain as we would expect. 

The ‘devilish details’ are perhaps more widely understood now, and of course the extensions to deadlines for payment holiday applications are I’m sure welcome – especially as I’m sure none of us expected this way of life to last for this long. But what I’d like to know now is what lenders are doing to support those that didn’t quite know what they were getting into – and indeed how they are proactively improving communications to those that are now opting to defer monthly payments or take out an overdraft as we continue life in lockdown.