There are a variety of reasons people struggle to make their car payments on time. Emergency expenses, a loss of income, rising car prices, and subsequently rising auto debt can all contribute to a monthly car payment that is too high. So, what do you do when you can't make your loan payment on time? It depends on what is written in your auto loan contract. Some lenders allow you to defer your car payment as long as you give notice, while others do not offer this option. Learn how auto loan deferral works, why you should consider it, and some alternative routes you can take.
How Auto Loan Deferral Works
Not every lender allows you to defer payment and you'll have to check your loan agreement to find out if it's a viable route. If deferral is possible, your auto loan contract will specify how to go about the process, the amount of time you have to pay, and whether you are required to pay a smaller amount or skip the payment entirely, and pay at a later date.
If the deferral is part of your loan agreement, it can be as easy as checking a "skip payment" box where you make your payments, but some lenders require the additional step of proving financial hardship with a "hardship letter". This is a written explanation of the reason you can't make your payments and when you plan to resume payment. When you request a car loan deferral, the lender may evaluate your financial situation in the same way as when you first applied for a car loan. If your credit score or your income significantly declined, the lender may deny the deferral.
Even if you get the deferral approved, realize that you're not off the hook for good. Your skipped payment will be tacked onto the end of your repayment period (think of the snow days you got in school as a kid that had to be made up at the end of the year). Additionally, the interest will accrue and you may be responsible for late fees.
Reasons to Defer a Car Payment
When your financial circumstances leave you with no choice but to miss a car loan payment, deferring the payment (assuming it is possible) will be in your best interest. By ghosting your lender and skipping your payment without any notice, you're simply burying your head in the sand and hoping your problems magically disappear. Your problems won't disappear. While your head is firmly planted in the sand, don't be surprised if a tow truck arrives to repossess your vehicle.
Deferring your loan payment buys you some time to save up and make the payment in the next month or two, and it can also save your credit rating. Because you went by the book to get the deferral approved, your credit score won't suffer in the same way it will if you simply miss your payments.
Temporary financial obstacles that can be remedied relatively quickly are typically the reason borrowers defer their car payments. These can include unexpected expenses like medical bills or a short stretch of time between jobs. However, if missed car payments become less of an anomaly and more of a habit, it's time to evaluate your alternatives.
Alternatives to Car Payment Deferral
If car loan deferral isn't an option because it's not included in your loan agreement or because of your inability to pay long term, you need to find an alternative way to remedy the situation. Some options include refinancing the auto loan, selling the vehicle, or voluntarily surrendering it to avoid repossession.
Refinancing your auto loan allows you to extend the terms of your loan to lower your monthly payments. Although it can provide a solution for car payments that are out of reach, the overall cost of the loan will grow due to the additional interest building up over the lifetime of your loan. Refinancing will be possible if your credit score has remained stable or has improved, in which case you may be able to score a better interest rate as well.
When your vehicle is worth more than you owe on it, you can consider selling it to pay off your loan and rid yourself of the car payment burden. Once you're able to sell, you can shop for an affordable used car that you can finance comfortably or even pay cash. If you're upside down on your loan (you owe more than the car is worth) and you can't keep up with payments, it may be time to voluntarily surrender your vehicle. Although no one wants to give up their vehicle, voluntary surrender beats the alternative of forced repossession and the chaos that comes with it.
