Payment holidays: one-third of consumers not aware that interest would still be applied

Just over a third of consumers were unaware that finance lenders were still allowed to charge interest on balances despite offering options to defer payments for up to six months under the well-known ‘payment holiday’ initiatives we have come to know of during the coronavirus pandemic.

A survey of more than 900 consumers by Resolver in November 2020 showed more than one in 10 (15%) had taken a payment holiday on at least one financial product – that is, the option to defer monthly payments for up to six months. Our respondents told us their experience of communications with their lenders was broadly positive, with 86% telling us that communications were at least somewhat, if not completely informative, 85% reporting them to be clear, and 87% stating they thought they were timely.

However, across all our respondents, 36% told us they were not aware that despite allowing payment deferrals, lenders are still able to charge interest on existing balances where applicable – and that many had done so. The same proportion (around one third) applied to those that had taken a payment holiday. 

In addition, just over one third that had taken a payment holiday (38%) told us that they felt they didn’t have all their options explained to them on how to proceed once the payment holiday had ended – including reduced payments or alternative plans. Just under a third however (29%) said they felt this was explained to them completely.

Our survey found that:

• Almost a third of those telling us they had taken a payment holiday had done so for more than one financial product;
• While perceptions of communication from lenders was positive, more than half (58%) of those who had taken a payment holiday felt that it wasn’t proactive; and
• A fifth of those surveyed told us they had used an overdraft facility over the preceding six months (more than four in 10 of this group had used more than £500). 

Concerns for the future

However, despite the generally positive experience of communication during the payment holiday process, it was clear from our respondents that they did not necessarily alleviate concerns for the future. More than half of those that had taken one said they were at least a little concerned about how to pay back their debt once their payment holiday has ended (within this group around four in 10 told us they were ‘very’ concerned). 

The proportion of those reporting that they felt concerned about paying back debt was lower for those using overdrafts (34%).

Meanwhile one in 10 respondents told us in November that they were intending to take a payment holiday – with around half of this group having already taken one. A similar proportion revealed they were intending to use an overdraft facility up to £500.

See Resolver CEO Alex Neill’s thoughts on our survey findings

At the time of the survey we contacted four major lenders (Natwest, Barclaycard, HSBC and Lloyds) for their position on how they are dealing with payment holidays. 

Lloyds stated that: “We have been contacting customers proactively to ensure they are fully supported and understand the options available, which may include applying to extend their current payment holiday.”

The bank also confirmed that taking a payment holiday would not affect their customers’ credit score, but added that “it is important to remember that all lenders take a range of information into account when making decisions on borrowing”.

Reasons for taking payment holidays

Of those that had told us they had taken a payment holiday, the reasons cited included uncertainty over finances and being able to keep up payments, with a number telling us that either they or someone in their household had either lost their job or been furloughed. 

Some said they used it as a ‘precaution’ while a handful conceded that it may not have been necessary but seemed like ‘a good idea at the time’.

Similar to payment holidays, our respondents reported broadly positive experiences of communication with their bank throughout using their overdraft facility. On the perception that communications were ‘misleading’ our respondents were more positive than for payment holidays (with more than three quarters citing they did not think so), though just over a third said they did not think communication was proactive.

What about complaints?

Resolver also looked at its complaints data over the finance sector and it is clear that we are starting to see complaints concerning the direct experience of using payment holidays – including the surprise to some that they were still being charged interest.

However, what we found particularly interesting is the number of consumers using Resolver simply to request a payment holiday from their lenders – almost half of the complaints specifically referencing the term.