Will Deferring A Car Payment Affect Your Credit Score?

Having a car is crucial in today’s world for commuting to work and handling daily tasks. Many individuals rely on auto loans to finance their vehicle purchases. However, unforeseen financial emergencies can sometimes make it difficult to make timely car payments. According to a report by the Federal Reserve, a staggering 7 million Americans are currently 90 days or more behind on their car loan payments.¹ If you find yourself in a similar situation, you may be wondering if deferring a car payment is a viable option. A deferment is a helpful pay period that allows you to temporarily skip one or multiple monthly payments. While you are still responsible for paying the missed payments, a deferment grants you the flexibility to delay making a payment for a short period of time. It serves as a short-term financial solution that prevents you from incurring late fees. Many people often mix up deferment with forbearance, but it’s important to know that these are two different financial solutions. The key distinction between forbearance and deferment lies in how interest accrues. Even if payments are temporarily halted during forbearance, interest continues to accumulate on the loan balance. On the other hand, deferment often has either no or limited accrued interest, making it a more favorable option for many borrowers. This can align better with your financial accommodation plan. Deferred payments can be a great option if you are facing financial challenges as they provide some extra time to organize your finances. However, it is crucial to keep in mind that eligibility for a deferment is dependent on your credit scores. Having a low credit score can impact the borrowing process negatively. If your credit score has declined since you initially obtained the auto loan, you may not qualify for an auto loan deferment. If you’re considering deferring your car payments, it’s a good idea to review your auto loan agreement first. Your repayment contract may contain valuable information about how to request a deferment period. In case you can’t find any details about payment deferment, don’t hesitate to reach out to a loan officer who can assist you. It’s important to note that not all lenders allow payment deferment. If your auto lender does provide this option, there might be a limit to the number of payments you can defer. For instance, they may only allow one or two deferments for your auto loan. If your lender approves your request for deferment, you may be able to do it conveniently online. Many billing webpages offer the option to “skip a payment”. However, if you don’t see this option, you might need to write a hardship letter. This letter should clearly explain why you need to defer a car payment and specify the date when you expect to resume paying your auto loan. It’s also possible that you’ll need to provide updated proof of income along with your letter. Typically, auto lenders who grant payment deferment will require you to sign a forbearance agreement. This separate contract will outline the number of car payments you can defer and designate when you must resume making payments on your existing loan. Keep in mind that deferring a car payment will extend the overall repayment length. For example, if you defer two payments on a 12-month car loan, your new repayment length will be 14 months from the date of car loan approval. Deferring car payments does not have a negative impact on your credit score. In fact, it is considered “paying as agreed” by the lender. As long as you stick to the repayment terms, your credit score will not decline and your credit report will not show any late payments. To stay up to date with your credit score, it’s always a good idea to obtain your free credit reports from the top three credit reporting agencies, namely Equifax, Experian, and TransUnion. Each agency provides one free annual credit report for your convenience. If you find yourself in a situation where you are unable to resume making car payments after a deferment, it can have negative consequences for your finances. It’s important to be aware that failing to make payments as agreed can result in a significant drop in your credit score and could potentially lead to your car being repossessed by the auto lender. While deferring payments itself does not affect your credit history, it is crucial to understand that not keeping up with the agreed-upon repayment terms can have a significant impact. Late or missed payments have the potential to greatly affect your credit score, as payment history plays a significant role in determining your creditworthiness. In fact, it accounts for 35% of your credit score calculation, making it the most critical factor. Having a poor credit score can directly impact your life by making it difficult to qualify for loans and can even affect your ability to find suitable housing. If you anticipate that you will be unable to continue making payments after the deferment period ends, it might be helpful to explore alternative options. There could be alternative solutions available to help you navigate this situation and ensure the best possible outcome for your financial well-being. Although your auto lender might not offer the option to defer payments, there are alternative solutions available if your financial situation changes while you’re repaying your auto loan. Consider the following options:

Consider Refinancing

If you need a long-term solution, you can explore refinancing your auto loan. This involves applying for quick cash loans, personal loan options, or other installment loans to pay off your existing loan. Refinancing can help you negotiate terms that are more manageable for repayment. If your credit score remains the same or has improved since you obtained your auto loan, you may be eligible for refinancing.

Apply for a Small Loan

If you’d rather not refinance your current auto loan, you have the option to apply for a small loan to cover one or two monthly car payments. This can be helpful if your finances have been disrupted by an unexpected bill or expense. By obtaining a small personal loan, you can avoid late fees and prevent any damage to your credit.

Transfer Your Auto Loan

If possible, you can attempt to transfer your loan to a family member or friend. This would involve the secondary party obtaining a new loan to purchase your existing loan and assume financial responsibility. It’s important to note that not all lenders allow loan transfers, so it’s advisable to consult with your lender or refer to your loan agreement for more information.

Consider Voluntary Surrender

If you find yourself unable to continue making car payments, voluntary surrender is a last resort option. This entails surrendering the vehicle to the auto lender. Keep in mind that a voluntary surrender will have a negative impact on your credit report and result in a decrease in your FICO score. However, it is generally less damaging to your financial history compared to repossession. If you’re currently facing financial difficulties and are unable to make your car payments, a deferment might be a helpful option for you! The good news is that deferring car payments won’t have a negative impact on your credit, as long as you manage to resume making payments once the grace period ends. If your financial situation isn’t looking great, it’s worth considering long-term solutions. One option to explore is refinancing your loan, which could potentially lower your monthly payments and extend the repayment period. For a deeper understanding of car loans and other financial products, be sure to visit Pachyy’s Dojo! References:

1. Car Loan Delinquencies | CBS
2. What Happens If I Defer a Car Payment? | Tom Kadleck Kia
3. What Happens If You Defer a Car Payment? | Experian
4. What’s the difference between mortgage forbearance and deferment? | Business Insider