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If you’re facing a difficult financial situation, like a job loss or medical emergency, you may want to look into car loan forbearance. Car payments are among the largest monthly expenses in American households, averaging $742 for new vehicles and $525 for used ones, according to Experian.
Temporarily pausing or reducing your car payment can give your budget some breathing room, but it can also bring higher long-term costs. Here’s a closer look at the pros and cons of car loan forbearance, primarily deferring car payments and a few other alternatives you can consider.
Car loan forbearance refers to the broader concept of pausing or reducing payments due to financial hardship, while car loan deferment is the specific approach of deferring certain payments to the end of your loan term. Some lenders may offer forbearance programs or use the terms interchangeably, but car loan deferments tend to be more common in the auto finance industry.
So, how do car loan deferments work, exactly?
Upon approval, a lender will allow you to defer a certain number of car payments to the end of your loan term. This means you can skip those payments without worrying about late fees or credit score damage. Once the deferral period ends, you resume your normal payment schedule with the deferred payments tacked on the end.
However, interest typically continues to accrue during the deferment period, increasing the total cost of your loan. You may also encounter other drawbacks, such as interest-only payments during deferral periods, deferment program fees or a balloon payment at the end of your loan or deferral period. It’s important to read the fine print carefully to ensure you understand all the costs.
Lenders vary in the hardship accommodations they offer and the requirements you have to meet to access them. For example, some lenders grant deferments with few questions asked, while others require qualifying major events, such as a job loss, income reduction, medical emergency, divorce or natural disaster.
No matter the case, if you want to postpone your car payment, don’t be afraid to ask your lender. Most will be willing to work with you. It’s in their best interest to help you avoid a default, as it allows them to collect all the interest on the loan while avoiding costly repossession procedures.
If you need to defer an upcoming car payment, here's how to go about it.
Start by taking stock of your situation. Review your budget and consider when you can reasonably expect to be able to afford your monthly car payment again.
For example, if you’re going to be out of work for two months due to a medical issue, you may need to defer at least two car payments. Set your goal and prepare to communicate it clearly to your lender.
Next, contact your lender to discuss your options. The earlier you reach out, the better.
Lenders may offer various solutions, such as adjusting your payment due date, deferring multiple car payments, or even modifying your loan. Ask about the details of any option you’re considering, including how it will impact your monthly payments and overall costs. Generally, changes that extend the length of your loan term will increase your interest costs.
In some cases, lenders require borrowers to submit a formal hardship letter — a written explanation of why you’re unable to make your car payment. If yours does, it should outline your current financial situation and provide the circumstances that led you to need to defer your car payment. You’ll want to be honest about your situation and clear about what you need.
Car loan forbearance or deferment offers relief during short-term financial hardship. If you find yourself in a situation that requires a long-term solution for your car payment, here are some alternatives:
Learn more about the ins and outs of deferring car payments.
When you miss a car payment, you’ll often incur a late fee and start getting frequent payment reminders. Once the 30-day mark has passed, lenders usually report the missed payment to the credit bureaus, which negatively impacts your credit scores. If you continue to miss payments, the loan will eventually go into default, and the lender will repossess the vehicle.
Car loan forbearance is a more general term that refers to a temporary suspension or reduction of monthly car payments. Car loan deferment is more specific and refers to the deferral of a set number of car payments to the end of an auto loan term.
In most cases, deferring a car payment means interest will continue to accrue during the deferment period, and the loan term will be extended. As a result, the overall cost of the loan will be higher.
Refinancing may give you a little break from making payments. For example, with RefiJet, you don’t have to make any payments for three months. Additionally, it gives you the opportunity to secure a lower monthly payment amount. Consider all the pros and cons before you make the decision to refinance.
While it may not ruin your credit score, it will hurt it. Missed payments are often reported to the credit bureaus after 30 days of nonpayment. The resulting negative marks hurt your credit scores and stay on your credit reports for seven years.
Need to defer your car payments? Learn how to pause or reduce payments, eligibility requirements, and potential impacts on your loan.
