Lending institutions understand that financial setbacks can happen. If you think you’re about to miss a payment on your auto loan, it’s best to contact your lender right away. There may be options, including deferment, that help you pause payments and avoid default.
This is especially true now, given the increasing rates of long-term unemployment and federal employee layoffs and furloughs, following the longest U.S. government shutdown. Many borrowers without steady paychecks or jobs have been forced to find alternatives to making payments and need assistance with their car loans and mortgages. There is a process that allows borrowers to take a breather and gather themselves — a deferment.
Here, we’ll explain how deferment works, who qualifies, and the pros and cons of deferring an auto loan payment.
What Is Deferment?
A deferment pushes the pause button on your car loan. Most of the time, lenders pause car payments for up to three months and add those payments to the back of the loan term. If you qualify, you can recenter yourself and get back on track. After the deferment ends, the car payments resume, and you continue paying as normal.
The downside to this option is that your interest continues to accrue, and your loan term is extended. Most lenders use simple interest contracts for car loans, meaning interest is computed daily based on your payoff balance. The length of the extension determines how much additional interest will build up, and a deferred payment calculator can help you estimate how much interest will accumulate during a deferment.
While deferment can increase your interest payments significantly, in the grand scheme of things, a few more months of car payments and interest charges are preferable to default, multiple missed payments, or repossession.
Who Qualifies for Auto Loan Deferments?
Qualifying for an auto loan deferment depends on the loan you have and your lender’s requirements for deferring payments. There are usually specific economic hardship criteria that make borrowers eligible to pause their loan payments. While some lenders approve deferments with few questions asked, others have policies that require major life changes for hardship assistance.
Major life events that may qualify borrowers for a loan deferment include:
- Job loss
- Income reduction
- Medical emergencies
- Divorce
- Natural disaster
- Military service
How to Defer an Auto Loan
Borrowers facing these circumstances should review their loan agreement or the lender's website to understand the policies on deferment, which can also be referred to as a forbearance or payment extension policy. Though policies vary by lender, here's what you can do to start the process:
- Reach out to your lender: Contact your lender to discuss the situation before your next car payment is due. Deferred payment plans aren't typically guaranteed, so contacting the lender for information on their specific policies is the best start. This is when you can explain your situation, request a deferment plan, and ask how long it will last and how payments will be handled, if you're approved. It's also a good opportunity to ask how interest, fees, and credit reporting will be managed.
- Keep the account current, if possible: It's important to know that most lenders don’t approve deferred payment plans unless you're current on the loan. If you’ve already missed one or more payments, then the lender is unlikely to approve it.
- Compile required information: Some lenders may require proof of temporary financial hardship before approving a car loan deferment. This could include submitting a hardship letter that explains the specific circumstances of when the hardship started, what caused it, and how long you expect it to continue. Depending on the policy, you may also need to provide evidence of hardship, such as financial documents like a bank statement, medical bills, or a pay stub, before getting approved.
Don't forget to ask your lender for a written agreement of your deferment plan and the date on which your payments will resume.
Deferment Pros and Cons
Deferring an auto loan is one option borrowers can consider if they are facing financial difficulties. Weighing the advantages and the disadvantages for your situation is key before signing an agreement.
In addition to offering immediate short-term cash flow relief, deferment is often one of the quickest and easiest options. It typically requires less work than a full loan modification and also helps you avoid the need to refinance your loan.
If you're approved for deferment, it can help you avoid late fees and missed-payment penalties. Generally, deferring your auto loan payment will not affect your credit score. Although lenders may report your account's new status to credit bureaus, typically, the deferment will neither hinder nor help your credit.
The biggest advantage of deferment is that it allows you to keep possession of your vehicle while you recoup your finances.
While deferred payments can help you avoid repossession of your vehicle, they are a temporary solution during financial duress. A deferment extends your loan term, and because interest typically continues to accrue, it can significantly increase your overall cost. For example, on a $25,000 loan at 7% APR, three months of interest is approximately $440. If you defer your payments for three months, that interest will likely be added to the loan principal.
Depending on your lender's policy, you may have to pay a fee for processing the deferment or, in some cases, continue paying monthly interest fees. If you're already delinquent on your loan, your lender is unlikely to approve a deferment, and this short-term solution may not be right for your situation.
Alternatives to Deferment
There are other options to consider before agreeing to a deferred payment plan on your auto loan.
Reschedule your payments: The simplest solution is to ask your lender to change your due date, especially if it falls before you receive your paycheck. This can offer some extra wiggle room while you review your budget and make financial adjustments.
Ask about other hardship programs: Your lender may be able to work with you to find solutions besides deferment. For example, your lender may agree to temporarily lower your monthly payments or interest for a set period of time.
Refinance your loan: If you have good credit, refinancing your loan through your lender or another lender to reduce your monthly payment or extend the loan term is another option. Refinancing involves getting a new loan on the same vehicle, and it isn't always available, so check with your lender for qualifications.
Trade in or sell your car: Selling or trading in your vehicle could be a last resort if the payment is unmanageable or if the car is worth more than you owe on the loan. Check your car's value using resources like Kelley Blue Book or Edmunds. While selling your car to a private party comes with its own challenges, depending on how much you sell it for, you might have enough money for a down payment on a less expensive vehicle.
The Bottom Line
Deferring your auto loan payments can be a helpful temporary solution if you're facing financial hardships. Most lenders are willing to make accommodations for borrowers, so contacting your lender to explain your situation and discussing your options before you miss a payment is crucial.
