If you purchased your vehicle using an auto loan, you have monthly payments that are due. Missing a payment could hurt your credit score and possibly lead the lender to repossess the vehicle. A car loan deferment can buy you a little extra time to get on track with your bills to keep that from happening.
What Is a Car Loan?
It’s tough to pay cash for large purchases. That’s where loans come in. You can borrow the money from a lender and pay it back, with interest, to allow you to enjoy those big-ticket items while you’re paying for them.
But there are rules that come with paying any loan back, and you agreed to follow those rules when you signed the contract. If you don’t pay on time, there will be late fees, although many lenders offer a short grace period before the late fees kick in. If you miss a predetermined number of payments, your loan goes into default, which means your car could be repossessed.
What Is a Loan Deferment?
Missing a payment doesn’t just put you at risk of vehicle repossession, but it can also hurt your credit score and keep you from getting future loans. To prevent that, it’s always best to get in touch with your lender if you think you might not be able to make a payment. A lender may help the borrower work out a payment plan so you can pay them at least a little bit of money toward the loan in the interim.
In some cases, lenders offer the option of deferment to give you a little extra time. With deferment, you skip, or “defer,” one or more payments. The missed payments are added to the end of your loan, extending the time you spend paying it back.
Read More: How to Defer a Car Loan
How Does Loan Deferment Work?
Whether your lender offers it or you’re approaching them about deferring some car payments, it’s important to go straight to your loan documents and read the fine print. If you don’t see loan deferment mentioned there, ask your lender for the requirements. Before you sign any documents authorizing the deferment, check the fine print there, as well.
Typically, the lender agrees to let you skip one or two payments, sometimes more, pushing those payments off to a later date. Deferred payments typically cover the entire monthly payment, but some lenders may still make you pay the interest. If not, it’s important to note that interest continues to accrue during that time frame and is added to your overall balance due.
Read More: How Does a Deferred Payment Work?
When to Get a Deferment
Loan deferment works best when you’re suffering a temporary financial hardship that keeps you from paying bills for a short time. If your economic hardship will last longer than a month or two, you’ll need a longer-term solution. Otherwise, you’ll just be buying time.
Another example of a good reason for a deferment is if you’ve been impacted by a natural disaster. A tornado, hurricane or localized issue like a house fire can require you to focus your efforts on repairing damage. Lenders often provide deferment as an option for a short period in these circumstances.
Hardship Documentation Requirements
If you can’t pay your car loan by the due date, your lender may or may not agree to a deferment. You need to reveal the reason for the hardship, and it will be up to the lender to decide if it qualifies. Requesting a hardship could be as simple as clicking a “skip a payment” option on the website, or you may have to call and plead your case.
Either way, some lenders require that you provide some documentation. The lender may ask you to put the request in writing, or you could be required to submit financial details. Some lenders even look at your credit score, and if it’s taken a nosedive over the course of your loan, you might be turned down.
Loan Deferment Limits
Financial difficulties aren’t always “one and done.” The COVID-19 pandemic has shown that temporary hard times can hit someone more than once within the same year. The number of times you can defer a payment depends on your lender. Yours may allow two or three deferments over the course of your loan, or you may be limited to one.
Since practices of auto lenders vary so widely, make sure you ask your lender if this is your only chance before accepting a deferment. You might not want to give up any chance of a deferment in the future in exchange for a deferment today.
Forbearance Agreements and Deferment
After reviewing your request and agreeing to a deferment of your auto loan payment, you’ll typically be given something called a forbearance agreement. The forbearance agreement details the terms, which may include the following options:
- Tack the missed payments onto the end of your loan, essentially extending the term of your loan. This typically requires something called a loan modification.
- Add the sum of the missed payments, divided across future payments, until you’re current.
- Pay the missed payments in one fixed lump sum.
Read More: How to Defer a Car Payment
Understanding Loan Modifications
Before agreeing to a loan deferment, make sure you know what you’re signing. Your lender should send you a copy of the forbearance agreement, which should state the following:
- When the deferment period begins and ends;
- Fees and penalties you pay for delaying your payment;
- How you repay the delayed payments, whether it’s divided among your upcoming payments, tacked onto the end or some other way.
This forbearance agreement is designed to protect the lender. However, it can also protect you. Although your credit score and future loan options shouldn’t be affected, this document serves as proof of the agreement if you ever have an issue.
What Happens After Deferment
Once your deferment period is over, you’ll resume paying your auto loan as agreed. A deferment means the missed payments are added to the end of your loan. You’ll simply resume your payments as before and pay them for the remainder of your loan term.
It’s important, once your lender has granted you a deferment, to do your best to stay on track with your payments. If you see you’re still in deeper than you’d planned, it may be time to consider some alternate options.
Do Loan Deferments Hurt Credit?
On its own, deferring your car loan once, or even multiple times, won’t hurt your credit. In fact, as long as your lender is happy and you’re satisfying the terms of whatever arrangement you’ve worked out, you should be fine. Make sure you have everything in writing and do what you can to keep your credit in good standing to avoid negative information on your credit report.
What can hurt your credit score, though, are late payments. Whether you ever risk default or not, even one late payment can start to lower your score. Making monthly on-time payments actually helps strengthen your credit score.
One way to protect your credit score and steer clear of going into default is to look closely at your loan documents. Most loans come with a grace period, which means even if you’re a few days late with your payment, it won’t set off alerts for your lender. This grace period is typically around 10 to 15 days, but it can vary from one lender to another.
Alternatives to Loan Deferment
If you’ve hit economic tough times, there are other options. Here are some alternatives to consider before reaching out to your lender.
- Change your due date: If you simply find your payment comes due at the wrong time each month, get in touch with your lender. Chances are, moving your due date to a different time of month will be easier than you think. You could move it to a date that’s separate from when your rent or mortgage is due, for example.
- Work out a payment plan: Sometimes the issue affecting your ability to pay is not temporary. If that’s the case, working out a payment plan with your lender could be a more long-term solution. Let your lender make suggestions and weigh all the options provided to work out the best one for your finances.
- Refinance the loan: Maybe your auto loan payment is simply more than you can afford no matter how you crunch the numbers. If you qualify, refinancing can be a great way to lower that monthly payment. If your loan isn’t close to being paid off, it could be a great option for reducing that payment.
- Sell the vehicle: In some cases, your car payment is simply more than you can afford. Selling your vehicle and purchasing a much less expensive one could give you a bigger break.
- Look to short-term options: Although it’s not wise to rely on high-interest options like credit cards, it could be a better option to get you through tough times than the hassle and fees that come with car loan deferment. A personal loan could also be a way to get through, provided your credit score is strong enough.
- Surrender the car: In some cases, giving up the car is the only reasonable option. This is obviously a last resort, but surrendering it protects your credit and helps you avoid the embarrassment of a repossession. If you voluntarily surrender the vehicle, your lender will sell it, and you’ll be responsible for paying any amount they lose on the deal.
The Consequences of Loan Default
If you’ve missed one or two payments, you probably already know you’re in trouble. If you fail to seek deferment, or your lender turns you down, it’s important to know the consequences.
Although your lender could declare your loan in default after you’re 30 days late on your payment, typically you won’t have to worry about repossession until you’re three months behind. But that first missed payment can ding your credit score, harming your loan options for years to come.
If you do pass three months, you have to start worrying about repossession. That means every time you leave your house or office, you’ll wonder if your car will be gone. After your car has been repossessed, you’ll have to deal with trying to get it back while also having a damaged credit score that makes it harder to replace your vehicle using another loan.
A monthly auto loan payment can be a costly budget item, but it’s important to take it seriously. Late payments can hurt your credit score, and consecutive missed payments can lead to your loan going into default, putting you at risk for a repossession. By being proactive when you’re having trouble paying, you can work something out with your lender that keeps you on track and prevents you from risking default.
- Consumer Financial Protection Bureau: Worried About Making Your Auto Loan Payments? Your Lender May Have Options That Can Help
- Experian: What Happens If You Defer a Car Payment?
- Federal Trade Commission: Behind on Car Payments Because of the Coronavirus?
- Experian: How Many Car Payments Can You Defer?
- NOLO: What's the Difference Between a Forbearance Agreement, Repayment Plan, and Loan Modification?
- Federal Student Office of the U.S. Department of Education. "Unemployment Deferment Request," Page 3. Accessed March 19, 2020.
- Federal Student Aid Office of the U.S. Department of Education. "Get Temporary Relief." Accessed March 19, 2020.
- Federal Student Aid Office of the U.S. Department of Education. "Student Loan Deferment Allows You to Temporarily Stop Making Payments." Accessed March 19, 2020.
- Discover Bank. "What Are Student Loan Deferment and Forbearance Programs?" Accessed March 19, 2020.
- Federal Student Office of the U.S. Department of Education. "Unemployment Deferment Request," Page 2. Accessed March 19, 2020.
- Brown University. "Deferment and Forbearance." Accessed March 19, 2020.
- Federal Student Office of the U.S. Department of Education. "Unemployment Deferment Request," Page 1. Accessed March 19, 2020.
- Federal Student Aid Office of the U.S. Department of Education. "Student Loan Delinquency and Default." Accessed March 19, 2020.
- Federal Student Aid Office of the U.S. Department of Education. "If Your Federal Student Loan Payments Are High Compared to Your Income, You May Want to Repay Your Loans Under an Income-Driven Repayment Plan." Accessed March 19, 2020.
- Federal Student Aid Office of the U.S. Department of Education. "Student Loan Forbearance Allows You to Temporarily Stop Making Payments." Accessed March 19, 2020.
- Federal Student Aid Office of the U.S. Department of Education. "If You’re Totally and Permanently Disabled, You May Qualify for a Discharge of Your Federal Student Loans And/Or Teacher Education Assistance for College and Higher Education (Teach) Grant Service Obligation." Accessed March 19, 2020.
Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.