Sometimes we have financial setbacks in life and making your car payment may become difficult. If that happens, you may have a great option with a loan payment deferment, which is when your lender allows you to postpone your current payment to the end of the loan term. Typically, you must pay the current month’s interest only, and some lenders may even waive the late payment fees.
Lenders are typically more willing to work with you if you’re proactive and communicate your interest to resolve any missing or late payments due to financial hardship. Here’s a quick guide on how loan deferments work.
How Does Deferring an Auto Loan Payment Work?
The lender may allow you to make a lower payment or no payment at all for one to three months. Of course, they will expect you to return to the regular payment terms of your loan when the deferment expires.
Some lenders do not allow deferments — those who do often have it written into the loan agreement.
A quick way to know if your lender allows for deferments is to look for a “Skip Payment” button on your online account dashboard. You might also find a deferment slip in your payment coupon book or you can simply call the lender and ask them directly.
You may be required to submit a formal written hardship letter, detailing your reason for wanting to defer payments and when you can make full payments again. The lender will likely require additional financial details, including your income and credit score, similar to the application process from when you first applied for your loan.
Your deferment request may be denied if your credit score has significantly dropped or if your income is much less than when you applied for the original auto loan.
If your lender grants deferment, expect to sign a forbearance agreement, which acts as a contract stating when you will begin to make regular payments again. The agreement also outlines your fees, penalties and any other costs associated with the deferment.
When Should You Skip or Defer a Car Loan Payment?
It may make sense to defer a car payment or two if you have experienced a financial setback, such as a loss of a job or an emergency expense. The deferment can help get you through a temporary hardship. If the financial strain is expected to be long term, hardship can buy you time until you find a long-term solution.
Alternative Options to Deferment
Deferment is a short-term solution when you’re facing financial hardship. Here are some alternative long-term solutions:
Refinance Your Auto Loan
Refinancing your existing loan balance with a new car loan may help if you’re having a hard time making your current loan payments on time. You may have lower payments and might even be able to get a lower interest rate. Like your original car loan, your car is used as collateral for the debt.
Generally, it is not a good idea to refinance your auto loan if the car is upside-down, meaning it is worth less than the balance on the loan. Also, avoid refinancing if your current loan is almost paid off or if the fees for the new loan are excessive.
Sell Your Car
Selling your car may free you from payments you’re struggling to make without damaging your credit. Pay off your original loan with the money from the sale of the car.
You can ease the strain on your monthly budget by purchasing a less expensive car with any money remaining from the sale. Ideally, you can find a car that you can buy in full, leaving you with no loan to worry about. Otherwise, look for a new car loan with a lower principal, better interest rate and lower payments than your current loan.
Find Someone to Assume Payments
Finding someone to take over payments may help your situation, but only if that person has good credit. Lenders commonly require new borrowers to apply for their own loans. If the borrower has a poor credit history and income, they may be rejected for a loan altogether, or they may be subject to a loan with a higher interest rate and monthly payment.
Surrender Your Car to the Lender
Giving your car back to the lender, also known as a “voluntary surrender” or “voluntary repossession,” is a last resort option. If you’re upside down on your loan, and the options above aren’t viable, you might consider returning the car to the lender.
Take note that the payments may not stop, even after returning your vehicle. The lender will try to sell your car and if they receive less than the amount you owe, you’ll be on the hook for the difference, known as the “deficiency balance.”
Since returning the car is a failure to repay your loan, a voluntary surrender may appear on your credit report as a negative entry for seven years. That’s may not be as bad as an involuntary repossession, but it is a mark you want to avoid, so exhaust all your options before taking this route.
It’s important to speak with your lender immediately when you know it will be difficult to make payments on time. Don’t make the mistake of waiting for phone calls or avoiding calls from the lender. That only makes the situation worse and your lender may be less willing to work with you.
Will Deferring an Auto Loan Payment Affect Your Credit?
If you defer your car loan with your lender’s permission, your credit report should not show any delinquency and your credit score should not be negatively affected. The keywords here are “lender’s permission.” To that end, make sure you have permission by submitting a forbearance agreement or by taking advantage of a built-in loan option if available.
It’s important to note that the deferment will likely get reported to the credit bureaus and appear on your credit report. But as long as the deferment is approved by the lender, the mark shouldn’t have any effect on your credit scores.
The Bottom Line
While deferring a car loan payment may not be ideal, it can provide welcome relief on your budget for a month or two to help you get through a difficult time financially. Remember to get your lenders express permission so that the deferment doesn’t appear as a delinquency on your credit report and your scores should be unaffected.
According to a Federal Trade Commission report, one in five Americans have errors on their credit reports. Even worse, 5% of the population is affected by serious errors that are likely resulting in overcharged credit card debts, auto loans and other financial responsibilities. Get your credit reports and scores and review their accuracy now.