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If you're facing a financial emergency and can't cover this month's car payment, a deferment on the loan could buy you some breathing room. It'll come at a cost, but it may be worth it to avoid the possibility of repossession.
Can You Defer a Car Payment?
Loan deferment is a temporary suspension or reduction of payments for borrowers with financial hardships. If you're eligible and communicate your situation to your lender in time, they may offer loan deferment as a solution to keep you from defaulting on your loan. Whether or not you can get one may depend on your lender, your loan agreement and the current status of your loan.
Not all auto lenders grant loan deferments. If yours does, it may have eligibility requirements for doing so, including:
- You must be current on your loan payments. Many, but not all, lenders require your loan payments, with no previous missed payments, to be current before they'll allow you to defer one or more payments.
- You haven't had another deferment recently. Auto lenders that allow loan deferments differ in the number and frequency they permit. Some lenders allow no more than one deferment over the life of the loan; others allow as many as two deferments per calendar year. Make sure you're within any limits spelled out in your contract.
A deferment may allow you to skip your payment altogether, or it may call for a reduced payment consisting only of the interest portion of your next scheduled payment. Either way, any skipped or reduced payments will be added on to the end of your repayment term, and interest will continue to accrue over those extra months. In addition, you could be charged a fee for each skipped payment.
To find out your options consult your loan agreement or ask your lender.
How Does Deferring a Car Payment Work?
Auto lenders that allow payment deferment have different procedures for requesting them, including.
- Skip a payment: Sometimes a deferment option is baked into your loan setup, and a "Skip a payment" option appears on the webpage where you make your payments or as a special coupon in your payment book. If you've never used it before, or if you're sure you're eligible to do so again based on your contract terms, you don't have to get any other special permission to use the option. Note that there may be a fee associated with using this option.
- Hardship letter: Some lenders require you to request deferment in writing in the form of a hardship letter, explaining why you need the deferment and when you'll resume your regular payments. Along with the letter (or in response to it), your lender may ask for pay stubs or other financial paperwork similar to what they required when you took out the loan. They may also review your credit score and credit report. If the lender agrees, it will issue a forbearance agreement for you to sign—a contract indicating when you will resume regular payments.
Reasons to Defer a Car Payment
The following are scenarios in which it might make sense to defer a car payment.
- You've experienced a one-off financial hardship. If money is unexpectedly tight this month due to an unexpected bill for medical treatment or car repair, a deferment may make sense. Just take steps to make sure you'll be able to cover your bill when payments resume.
- You need time to make new arrangements. If you know you won't be able to keep up with your current payment schedule, deferring a payment can buy you time to make other arrangements such as selling the car, refinancing the car or transferring the loan to someone else (more on those options below).
Does a Car Loan Deferment Hurt Your Credit?
No, if you obtain a deferment according to the terms of your loan agreement, it will not hurt your credit scores.
Failure to resume regular payments after a deferment, or stopping or reducing payments without following required deferment rules, can lead to negative credit report entries that can hurt credit scores.
How to Defer a Car Payment
1. Know Your Options
Review your loan agreement and information on the website where you pay your bills to understand the lender's policy on loan deferment. Deferment may also be referred to as "loan extension" in the contract language.
2. Prepare a Hardship Letter, if Needed
If your loan has a "skip a payment" option, you can just use that as long as you're within any rules spelled out in your contract. Otherwise, draft a letter that includes:
- Your name and address
- Your loan ID number
- The amount you've paid on the loan so far and the amount you still owe
- Your reason for seeking a deferment
- When you expect to be able to resume regular payments
Be specific about the nature of the hardship (a home repair bill or medical emergency, for instance).
3. Supply Information Upon Request
If asked, be prepared to furnish information including the following to back up your hardship letter:
- Bills documenting unexpected expenses
- Pay stubs or other proof of income
Alternatives to Car Payment Deferment
Here are some other options to consider if you're having difficulty covering your car payment.
- Change your payment due date. The timing of your payment due date could make it hard to cover your bill if, for instance, your bill comes due a few days before payday every month. Moving the due date could help you keep up with payments, and most lenders will agree if you ask.
- Sell the car. If the vehicle is worth more than you owe on the loan, you may be able to sell the car to a private party and use the proceeds to pay off the loan. Depending on how much you get for the car, you might have money left over to use as down payment on a less expensive vehicle.
- Refinance your loan. If your income is steady and you just need a smaller car payment each month, consider refinancing your loan—obtaining a new loan with lower payments and using it to pay off the old one. Ideally, this option would also get you a lower interest rate, but if your current loan is more than two years old, steady rate hikes may have made that impossible. Even if your interest rate is comparable to the one on your current loan, stretching out the payback period to get lower payments could mean significant extra cost to you, but it lets you keep the car and is preferable to repossession.
- Transfer the loan to someone else. Many auto loan agreements disallow this, but your lender may work with you to transfer your loan to another borrower. The person assuming payments will have to qualify for the loan, so if you want to go this route, make sure the candidate's credit score and income are at least comparable to yours; then contact the lender to see if they're amenable.
- Ask your lender about other hardship options. If you don't think you'll be able to pay your auto loan going forward, contact your lender to ask if they can offer any hardship options. If you are proactive about your problems, some lenders will work with you, especially in unusual situations such as a major economic downturn.
- Do a voluntary surrender. If the car is worth less than what you owe on it, or as a last resort if no other payment relief is available, you may have to opt for voluntary surrender—turning the car over to the lender before they repossess it. A voluntary surrender appears as a negative entry on your credit report and likely will lower your credit score, but it is considered less derogatory than a repossession.
The Bottom Line
Car loan deferment is never an ideal option, but if you just need a month or two of relief to get your payments back on track, it can give you room you need to maneuver. To understand how deferment may be affecting your credit score, or to gauge your ability to qualify for auto refinancing, check your FICO® Score☉ for free from Experian.