Struggling with car loan payments? You’re not alone. Many people are buried under more than $1.6 trillion in auto debt, and falling behind on payments is a common issue. If your lender offers a car loan deferment, also known as a payment extension, you might think it’s a quick fix. However, it’s crucial to understand the long-term impact of deferring payments before making a decision.
In this guide, we’ll break down what you need to know about car loan deferments, reveal hidden costs, and help you navigate your options.
What Is a Car Loan Deferment?
A car loan deferment lets you postpone one or more payments to a later date. It’s often used when borrowers face financial hardships like medical emergencies, natural disasters, or sudden job loss. Not all lenders offer deferments, and those who do have varying policies. For some, you need to have made a certain number of on-time payments before qualifying for a deferment.
Key Points to Remember:
- Deferment and extension mean the same thing.
- Terms can vary by lender.
- Always ask for specific terms in writing.
How Does a Car Loan Deferment Work?
To grasp the full impact of a deferment, you need to understand how car loan interest works. Most car loans use simple interest, meaning you accrue interest daily. If you defer payments, interest continues to build up, potentially increasing your total debt.
For example, imagine you have a £15,000 loan with a hefty 25% interest rate over 72 months. If you defer a £404 monthly payment, the interest on that deferred amount continues to accrue. At the end of the loan term, you might be hit with a balloon payment—a large, unexpected lump sum that can be financially crushing.
Who Decides If You Can Defer a Payment?
The decision to approve a deferment usually lies with the lender, not the car dealer. If you’re having trouble making payments, contact your lender directly. You are not obligated to use the dealership’s financing; you can explore other lenders.
Will Deferments Cost You More?
In many cases, yes. Deferments can lead to increased overall costs due to additional interest. For borrowers with multiple extensions, this can result in thousands of pounds in unexpected charges.
For instance, a borrower who received multiple extensions from Exeter Finance ended up with a balloon payment of roughly £6,000. Many borrowers reported not fully understanding the financial impact until it was too late.
Should You Take a Deferment?
Deciding whether to defer payments should involve a thorough evaluation of your financial situation. Consumer finance experts suggest:
- Assess your financial health: Can you manage essential expenses if you defer?
- Understand the total cost: How will a deferment affect your overall loan balance?
- Consider alternatives: Could you adjust your budget or find other solutions?
Questions to Ask Before Accepting a Deferment
Before agreeing to a deferment, make sure to ask:
- What is the new loan maturity date?
- Are there any additional fees or penalties?
- How will the deferment impact my monthly payment amount?
- What will my future payments look like, in terms of principal versus interest?
Will Deferments Affect My Credit Score?
Typically, a deferment doesn’t directly impact your credit score. However, failing to resume payments on schedule or dealing with a large balloon payment can harm your credit.
Alternative Options to Consider
If you’re unable to make your car payment, there are other strategies:
- Change your payment date: Align payments with your income schedule.
- Request a payment plan: Negotiate a temporary reduction in payments.
- Refinance your loan: Seek a new loan with better terms, potentially lowering your interest rate.
What to Do If You Can’t Afford the Deferment’s Costs
If you’re struggling with the costs after deferring payments, explore these options:
- Refinance: Lower your interest rate if your credit score has improved.
- Seek professional advice: Consult credit counselling services.
- Understand repossession terms: Know that you might still owe money even after your car is repossessed.
What If Your Lender Didn’t Provide Adequate Information?
If you feel your lender failed to provide necessary information, first attempt to resolve the issue with them directly. If that fails, consider filing a complaint with:
- The CFPB: CFPB Complaints
- Your state attorney general: Find contact details via state attorney general’s database
You may also explore legal help options through the CFPB’s attorney list.
Conclusion
Understanding the real costs of car loan deferments is crucial to managing your financial health. Before deciding, get all necessary details in writing, weigh all your options, and seek advice if needed.
