If you don’t make your car payments, the lender can take the car away from you. Deferring a car payment helps you avoid that. However, it’s not something you can do all the time, and it comes with consequences. The length of time you can defer payment depends on your lender’s policies but may be allowed for one to three months.
What are deferments on car loans?
A deferment on a car loan is when you request to skip a payment. That communicates to your lender that you do intend to pay but can’t at the moment. The payment extension helps you avoid repossession.
Types of deferments available on car loans
Deferments are not all created equal. There are a few different types, and it’s important to know about each so you can understand what option would serve you best.
1. Principal deferment
The principal on an auto loan refers to the amount you borrowed, which is different from the amount you’ll actually owe. The money you owe will include interest payments, as well as other taxes, insurance, and fees. Principal deferment refers to a temporary postponement of the repayment of the principal amount of a loan. During this period, the borrower is typically only required to make regular interest payments, while the repayment of the principal is deferred to a later date.
2. Interest-only deferment
Interest-only deferment is a type of deferment where the borrower is allowed to temporarily suspend the repayment of the interest while still paying the principal. That action lowers your monthly payment temporarily, although your loan will still accrue interest that you’ll eventually need to pay back.
3. Payment suspension deferment
Payment suspension deferment is a deferment option available to borrowers where they are allowed to temporarily suspend all payments on a loan, including both the principal and interest. This deferment is usually granted in situations where the borrower is facing financial hardship or undergoing certain life events, such as unemployment or medical emergencies.
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Why deferment on a car loan is a good idea
Deferment on a car loan should not be done lightly, but it’s a great help during times of financial hardship where you’re facing unexpected expenses. After a car wreck or visit to the emergency room, you may need time to move some money around and could then opt to defer payment on your car loan. Doing so ensures you don’t have a late payment on your record, which could damage your credit score and put you at risk of repossession.
How many deferments are typically allowed on car loans?
Lenders are not all equal, so the number of deferments you’ll be allowed on a car loan will vary. Keep in mind that many lenders will only approve one deferment, where others may approve two or more. Those stipulations could also apply yearly, or to the life of your entire loan.
Factors that may affect the number of deferments allowed
The number of deferments you’ll be allowed will depend on a number of factors, so you’ll need to talk with your lender to find out specifics. However, there are some things that stay fairly consistent in how they influence the number of deferments you’ll be permitted.
1. Credit history and score
Having a good credit score and history could prove to your lender that you’re trustworthy, encouraging them to approve a more favorable deferment period.
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2. Loan term and amount
Some lenders will allow you to have a certain number of deferrals per year, while others base their deferral admittance on the life of the loan. If your lender bases it on the number of years you’re aiming for, you’ll likely be able to get more deferments in total. The lender may also take the amount of the loan into account. For instance, lenders may be more understanding about higher loan amounts.
3. Lender policies and guidelines
Some lenders may have steadfast policies that mean no matter what you’re going through, you may not be able to convince them to give you an extra deferment. Make sure to research those rules before taking out the loan.
What to consider before requesting a deferment
Taking a loan deferment is no small thing. You should seriously consider all aspects and impacts before requesting one.
1. Impact on overall loan repayment
If you skip a few months of payments through a deferral, keep in mind that you still have to pay that money back.
2. Accrual of interest during deferment periods
Even though you aren’t making the same level of payment on your loan during a deferment period, interest still accrues. That means you’ll wind up paying more over the life of the loan.
3. Potential effects on credit score
Loan deferrals don’t directly impact your credit. In some cases, they may keep your credit score safer by making sure you don’t miss a payment. However, deferments are something you ask for, not a guarantee. If you think you can count on approval and wind up missing a payment as a result, that will bring your credit score down.
4. Alternatives to deferments
Loan deferment may not be the best option for everyone. You may instead be able to negotiate with your lender to consider refinancing your loan, leading to a lower monthly payment that may solve the problem in a different way. You could also consider extending the loan. Some may even want to look into loan forbearance, which is similar to deferment, but extends for a longer period of time.
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When to Defer Payments on Car Loans
Deferred payments can be a lifesaver when you’re in financial stress. Just know that they come with consequences: you’ll likely still accrue interest and may have to pay some amount of money, even if it’s less than your monthly bill. Keep in mind there are different types of deferments you can choose from.
FAQ
Will I be charged interest during a deferment?
Interest does still accrue if you’re taking a gap in payment. Whether that’s due each month or skipped during the period of your deferment depends on what type of deferral you’ve elected.
Can I apply for multiple deferments at once?
If your lender allows more than one deferral for a one-month period at a time, you can apply to have more than one at a time (as in, two to three months in total).
How long can a deferment usually last?
Deferments are typically allowed for between one and three months. Few lenders will allow up to six months of deferrals.
Anna Yen Anna Yen, CFA, has nearly 2 decades of experience in financial markets, primarily with JPMorgan and UBS. Currently, she manages digital assets and her goal at FamilyFI is to empower families with financial literacy. She’s worked in 5 countries and visited 57.
