It doesn’t matter whether you make $10,000 per year or $1 million per year — we all go through financial ups and downs. Medical issues, employment gaps, unexpected expenses, and other basic parts of life can get expensive in a hurry.
If you’re in a tough financial spot, you may have heard about deferring your car payments as an option. While this is a possibility for many car loans, it’s not exactly a free pass. Make sure you know all the facts before you hop on board.
What Is a Deferred Car Payment?
A car payment deferment is an agreement between you and the lender in which the lender agrees to postpone or reduce your payment for a few months. Generally, the longest they’ll allow a deferment is two to three months, but it’s all at the lender’s discretion.
In most cases, you’ll go through an application process or submit a form called a hardship letter to explain why you’re having difficulty making payments. It’s then up to the lender whether to grant your request.
Pros of Deferring a Car Payment
Car payment deferments can be helpful in situations when you have a temporary, emergency financial situation. For example, perhaps you have a short employment gap, you have emergency medical bills to pay, or you need to pay for car repairs to continue going to work.
The benefit is that when you have a deferment, you have a break from making your payments.
Another plus is that your lender will report to the credit bureaus that you’re making your payments on time or ‘as agreed’. This is completely different than if you were to simply skip a payment without having an official deferment; they would most certainly report your missed payment to the credit bureaus after 30 days!
Cons of Deferring a Car Payment
While deferred payments are better than simply not paying your car loan, that’s where the benefits end. Lenders sometimes charge a fee for each deferred payment, and this can become expensive.
How Deferred Payments Affect Your Long-Term Costs
Plain and simple, in the long run, deferring car payments will cost you more money.
When your payments are deferred, the interest continues to accrue. This means that when your deferment ends and you resume your monthly payments, your balance will be higher than it was when your deferment started.
On top of this, it’s important to note that those deferred payments don’t go away; they’re just delayed. If you had a 36-month loan and you deferred two payments, it will now take a total of 38 months to pay it off. That means you’re paying for 38 months’ worth of interest, not 36 months’ worth.
Remember too that during your deferment, the balance is rising because you’re accruing interest without paying down any of the balance. For the rest of the length of your loan, your interest amount every month is higher than it would have been without the deferment because your balance is higher. Depending on your loan and the amount of the balance when you deferred, this could add up to hundreds or more over the life of the loan.
Is It Ever Wise to Defer My Car Payments?
A car payment deferment is an option if you’re in temporary, dire financial straits, and it’s a better option than simply skipping the payment without communicating with your lender. However, it should be one of your last resorts.
It’s typically better to look for other options first. For instance, you could try to pick up side hustles or a second job to cover your bills during a temporary time of hardship. You could take a hard look at your budget to see exactly how much fat you can trim from your expenses, such as streaming services, groceries, entertainment, memberships, etc.
Of course, there may be times when cutting and side hustling simply won’t be enough and a deferment is your best option. Do it.
What Can I Do If My Payment is Too Large for the Long Term?
As we noted, car payment deferments are meant for short-term financial hardships. What if your income drops for the foreseeable future, though, such as dropping to a lower-income job or retiring?
In these cases, it’s better to refinance your auto loan. You could refinance it for a lower payment if your balance is significantly lower than it was originally, if your credit score has increased, or if average interest rates have dropped, for example. You can also sell your vehicle, ensuring that the amount you sell it for covers the balance remaining. There may be additional options available through your car lender; communicate to find out.
Understanding Your Financial Options
We all know that our wallets will go through good times and bad times, and it’s important to prepare for possible difficulties by knowing the best ways to work around them. In addition to starting to build up your rainy day fund, check out our resources to learn more.