A deferred payment is one that gets pushed back to a later date, typically to the end of your loan term. Borrowers that are going through financial struggles often take advantage of deferment programs to get through tough times, but how do these deferred payments impact your credit score? Let’s talk about it.
Deferred Payments and Your Payment History
Payment history is the most important part of your credit score, making up 35% of it. It would make sense that if you’re not making payments, since they’re deferred, it would harm your credit score. Fortunately, that’s not the case!
Deferred payments are noted as such to the credit bureaus – Experian, TransUnion, and Equifax. For example, during the coronavirus pandemic, accounts were noted if there were in forbearance or deferment “using a special code that indicates the account has been affected by a declared disaster,” as reported by Experian.
Even in non-emergency situations, accounts in forbearance or deferment are reported as such to credit bureaus so the “skipped” payments don’t harm your credit.
Additionally, since the lender has to agree to the deferment plan, they aren’t supposed to report missed or late payments to the credit bureaus. Your account should remain current during the deferment period, which is typically around 30 to 90 days, depending on what the lender agreed to and what you qualified for.
If you are seeing missed or late payments being reported despite your car loan being in deferment, contact your auto lender right away and the credit bureau reporting the incorrect activity. You have the right to dispute inaccurate information reported on your credit reports and have it removed. You can also file a dispute online with all three credit reporting agencies.
How Auto Loan Deferments Work
To qualify for a car loan deferment, start by talking to your auto lender. Lenders often allow deferments for borrowers going through financial difficulties such as job loss, furlough, unexpected medical issues, or other emergency situations.
However, if you’ve already missed a payment or two (missed defined as at least 30 days late), or have a late car payment, then you’re not likely to qualify for a deferment plan. Your lender may also require you to complete a hardship letter, outlining why you need the deferment to see if your circumstances qualify for the pause in payments. Not every borrower in every situation qualifies for a deferment plan, but the sooner you contact your lender about your options, the more options you may have.
You should also know that not all deferment plans stop interest charges. You may be required to continue paying accrued interest during the deferral period, so check with your lender and review the language in your loan contract to cover all your bases.
Deferred Payment Incentives
Deals and incentives can take on many forms when it comes to car buying. Typically, they're offered on new cars, and one form they can take on is a deferred payment incentive. An example of this is a "no payments for 90 days" deal. A deal like this may sound like a decent move, but those three months of payments don't just disappear.
They're usually added to the tail end of your loan, or divided up among your remaining loan payments. Either way, the 90 days of payments you would have made over the first three months of your loan are still hanging out accruing interest. This means that you're actually paying more than you would have by making those first three payments.
Deferred Down Payments
Similar to a deferred payment deal, a deferred down payment can seem like a good way to go if you can't quite come up with the cash to complete the down payment on the vehicle you want. Also similarly, the plan can be more trouble than it's worth.
Deferred down payments aren't very common. In many cases, especially those with borrowers who have poor credit, a down payment is a requirement. If you're considered a bad credit borrower you're typically expected to put down at least $1,000 or 10% of the vehicle's selling price.
If you may meet all the qualifications, but fall short on your down payment requirement, some lenders allow you to defer the amount you can't cover just yet. The dealer usually collects a post-dated check and/or a credit card number from you, to be charged at a later date. If you can make this work it can be helpful.
However, if you have any doubt at all about meeting that deferred down payment arrangement, don't go through with it. In this case, it may be a better bet to wait a month or two to save the rest of your required down payment and return to the dealership with cash in hand.
Deferred Payment Programs
Unlike deferred down payments and incentive deals, which both happen at the beginning of your auto loan, deferred payment programs are designed to help borrowers who get in a pinch. These plans push back your payment, allowing you to skip a certain number of payments, typically no more than three (90 days), though this varies by lender.
The skipped payment or payments are usually added to the back end of your loan, and interest continues to accrue. This can be a great option if you just have a hiccup or if something unexpected pops up to interrupt your budget. Not all lenders allow deferment, but you have a better chance if you let your lender know at the first sign of trouble, rather than waiting until the last second.
Deferment Not an Option?
If deferring your car loan payments isn’t an option, then it may be time to get into a more affordable auto loan. Right now, trade-in values are very high due to low new car stock, and now may be the time for you to take in your used vehicle for something more affordable.
Here at Auto Credit Express, we’ve created a nationwide network of dealerships that assist borrowers in unique credit situations. We want to look for a dealer in your local area with resources for borrowers with credit challenges. Get started today by filling out our free auto loan request form, and we’ll get right to work!