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If you find yourself unable to make a payment on your car loan, deferring your payment for one or more months can buy you some temporary breathing room, but it will come at a cost.
How Does Deferring a Car Payment Work?
Under a car loan deferment, the lender agrees to let you pay a lower payment or no payment at all for a month—or two, or three, but probably not much longer than that—with the expectation that you'll be able to resume your regular payment schedule after the deferment ends.
Not all auto lenders allow deferments, and those that do have different procedures for requesting them. Sometimes a deferment option is built into your loan agreement (in which case you might see a "skip a payment" option on the webpage where you make your payments or a "skip payment" slip in your payment coupon book). Other lenders require you to submit a written request, known as a hardship letter, in which you explain why you need the deferment and when you'll resume your regular payments.
Along with the hardship letter, your lender may ask for additional financial details (not unlike the information they probably required when you took out the loan), and they may also review your credit score and credit report. If your credit score has declined significantly since you got your car loan, or if your income or assets have dropped, the lender might decline to give you a deferment. If the lender agrees to the deferment, it will issue a forbearance agreement for you to sign—essentially a contract indicating when you will resume your regular payments, specifying any fees or penalties you'll be charged as part of the arrangement.
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 period, and interest will continue to accrue on the loan for those extra months, so that you'll have to pay significantly more than the amount of each deferred payment before your loan is repaid. In addition, you'll likely be charged a fee for each skipped payment, so a deferment is anything but a free pass.
When Does It Make Sense to Defer a Payment?
Deferring one or two car payments makes sense if you've experienced an emergency expense or temporary reduction in income that you know will be remedied within a short time—for instance, if you have a lull between the end of one job and the start of another. If you seriously doubt you'll be able to get your payments back on track after a month or two, you can use deferment to buy some time, but you'd probably be wise to use that interval to consider finding a less expensive ride.
If you can't get a forbearance agreement from your auto lender, or it becomes clear that you won't be able to resume your regular payment schedule after your authorized deferment period ends, consider selling the car. If you can get more for the car than what you owe on the loan, you may be able to put the surplus from the sale toward a less expensive vehicle (or a ridesharing service).
Does a Car Loan Deferment Hurt Your Credit?
If you defer payment(s) with the lender's permission, either by exercising an option built into the loan agreement or by arranging a forbearance agreement, you'll be considered "paying as agreed" with respect to the loan. Your credit report will not reflect any delinquency as a result, and the deferment will not adversely affect your credit scores.
If you are in a situation where you're having difficulty paying your car payment, take care that you don't miss any other bill payments, because that certainly would have a negative impact on your credit scores.
Alternatives to Car Payment Deferment
Refinancing. If your income is steady and you're simply finding your car payment too large to manage every month, one alternative to consider is refinancing your car loan—essentially taking out a new loan with smaller monthly payments. You'll likely only be able to do so if the car has retained most of its value, and your credit has remained as strong as it was when you took out your loan (or become stronger). Refinancing your loan to get smaller monthly payments will almost always mean extending the repayment period on the loan, adding to the overall number of payments and to the total cost of the loan. That could mean significant extra cost to you, but as an alternative to missing payments or defaulting on the loan, it could be well worth it.
Getting someone else to assume the loan. This is a long shot, because most auto loan agreements expressly forbid it, but a select few lenders may work with you to help arrange the transfer of your loan to another person. In fact, this involves the lender issuing a new loan to the transferee, so the person assuming payments must be willing and able to take over payments at least as large as those you're making and have credit as good or better than yours to qualify for loan terms comparable to yours. If you want to go this route and you have a potential transferee in mind, make sure you know their credit score (and that it's comparable to yours), and then contact the lender before any funds trade hands to make sure you can proceed.
Voluntary surrender. No one wants it to come to this, but if all else fails, or if the car is worth less than what you owe on it, you may have to consider turning it over to the lender in a process known as voluntary surrender. This is essentially forfeiting the car before the lender repossesses it. Because a voluntary surrender is a failure to repay your car loan, it appears as a negative entry on your credit report and likely will lower your credit score. It is considered less derogatory to your credit than a repossession, but it's still something you should try to avoid if at all possible.
Car loan deferment is never an ideal scenario, but under circumstances where you just need a month or two of relief to get your payments back on track, it can provide some welcome room to maneuver.
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