Owning a car is essential these days to travel to work and run errands. Many people finance the purchase of their vehicle using auto loans. However, there may come a time when you are unable to make a car payment due to an unforeseen financial emergency. A report from the Federal Reserve finds a record 7 million Americans are at least 90 days behind on their car loan payments.1 If you are also behind on your monthly payments, you may be curious whether you can defer a car payment.
What Is a Deferment?
A deferred payment is a pay period that allows you to skip one or multiple monthly payments. You are still required to pay the missed payments, but you can postpone making a payment for a while. A deferment is a short-term financial solution that helps borrowers avoid late fees.
Individuals often confuse deferment with forbearance, but they are two different financial solutions. The main difference between forbearance and deferment is how interest accumulates. Even if payments are temporarily paused, a forbearance still accrues interest on the loan balance. Many borrowers prefer a deferment because there is either no accrued interest or limited accrued interest. This can fit better into a financial accommodation plan.
Deferred payments are a great option if you experience financial issues; they can give you a little more time to organize your finances.
However, keep in mind that eligibility for a deferment is dependent on credit scores. A bad credit score can negatively affect the borrowing process. If your credit score has decreased since you obtained the auto loan, you may not qualify for an auto loan deferment.
Applying To Defer Car Payments
If you are considering a deferment, review your auto loan agreement. You may be able to find helpful information about a deferment period in your repayment contract. If you cannot locate information about payment deferment, you can talk to a loan officer.
Keep in mind that some lenders do not allow payment deferment. If your auto lender does allow borrowers to postpone car payments, there may be a limit. For example, a lender may only allow borrowers to defer one or two auto loan payments.
If your lender agrees to a deferment, you may be able to defer a car payment online. There may be an option to “skip a payment” through the billing webpage. If you don’t see this option, you may have to write a hardship letter. A hardship letter is a detailed document that explains why you want to defer a car payment and when you expect to resume paying your auto loan. You may also have to provide updated proof of income with your letter.
Auto lenders that grant a payment deferment typically ask borrowers to sign a forbearance agreement. A forbearance agreement is a separate contract that stipulates how many car payments you can defer and when you must resume paying the existing loan.
A deferred car payment is added to the existing repayment length. Suppose you defer two payments on a 12-month car loan. In that case, the new repayment length will extend to 14 months from the car loan approval date.
Does Deferring a Car Payment Hurt Credit?
Are credit scores negatively affected if a borrower is deferring car payments? The answer is no! When a lender allows you to defer payments, you are “paying as agreed.” If you adhere to the repayment terms, your credit score will not decrease, and your credit report will not reflect any delinquent activity.
It’s always good to stay updated on your credit score, so make sure you get your free credit reports from the credit bureaus. The top three credit reporting agencies (Equifax, Experian, and TransUnion) each provide one free annual credit report.
What if I Can’t Make Payments After a Deferment?
If you were granted a deferment and failed to resume making car payments by the agreed-upon date, your finances could suffer. Your credit score can drop dramatically, and an auto lender could have your car repossessed.
Deferring payments does not alter your credit history, but failure to keep up with the repayment terms does. Missing or late payments can significantly affect your credit score. Payment history accounts for 35% of a credit score calculation, making it the most critical factor. Bad credit can directly impact your life by making it hard to qualify for funding and even impact your ability to find adequate housing.
If the end of a deferment period is coming up and you know you cannot continue making payments, you can consider alternative options.
Alternatives To Deferred Payments
While most lenders allow deferments, your auto lender may not offer a deferment policy. If your financial situation changes while you are working to pay back an auto loan, know that alternative options are available.
Refinancing
If you need a long-term financial solution, you can try refinancing your auto loan. Refinancing means applying for quick cash loans, personal loan options, or other installment loans to pay off existing ones. Refinancing a loan can help you get different terms that make the repayment process more manageable. If your credit score is the same or higher than when you obtained your auto loan, you may qualify for refinancing.
Use a Loan
If you do not want to refinance your current auto loan, you can apply for a small loan to cover the cost of a monthly car payment or two. Suppose your finances were temporarily disrupted due to an unexpected bill or expense. In that case, you can try applying for a small personal loan to prevent late fees and damage to your credit.
Transfer the Auto Loan
If you are able, you can try transferring your loan to a family member or friend. This secondary party would use a new loan to buy your existing loan and assume financial responsibility. Many lenders do not allow loan transfers, so speak with your lender or check your loan agreement.
Voluntary Surrender
The ultimate last resort if you cannot continue making car payments is to proceed with a process known as voluntary surrender. A voluntary surrender means turning the vehicle over to the auto lender. If you voluntarily surrender your vehicle, negative information will appear on your credit report. You will also have a decreased FICO score. However, a voluntary surrender is less damaging to your financial history than a repossession.
Final Thoughts From CreditNinja: Should I Consider Deferring a Car Payment?
If you are experiencing financial issues and cannot make payments right now, a deferment may work in your favor! Deferring car payments does not negatively affect your credit as long as you manage to continue making payments once the grace period ends.
If your financial situation is not looking too good, consider long-term solutions. For example, refinancing a loan could help you obtain lower monthly payments and an extended repayment length.
To learn more about car loans and other financial products, check out CreditNinja’s Dojo!
References:
- Car Loan Delinquencies | CBS
- What Happens If I Defer a Car Payment? | Tom Kadleck Kia
- What Happens If You Defer a Car Payment? | Experian
- What’s the difference between mortgage forbearance and deferment? | Business Insider
