What Is Deferring a Car Loan?

Deferring a car loan is an option that some people use to save their car from being repossessed. It also gives low-income people a way to buy a new car that they otherwise could not afford. It is a risky procedure to undertake -- if you are allowed to do it at all. If you are considering deferring a car loan, it is imperative you understand all the ins and outs, or you could lose your car.

An interest only type of deferred car loan is typically used for a new car purchase with people who can’t afford the car now but expect to be able to later. The loan is usually set up so you pay only interest payments until the end of the term. At that point, you pay the entire principal. If you expect to be making more money, or if you are a good planner and can save up for the balloon payment, this type of loan would work for you. If not, you have two options: You can try to refinance the balloon payment, or you lose the car. If the dealer allows you to refinance, your interest rate will go up, and so will your monthly payments because you would pay interest and principal, meaning you would pay interest twice.

Forbearance allows borrowers to take a break from paying back their loan. If a lender agrees to this arrangement, the length of that break will be limited. To get a deferment using a forbearance agreement, you would approach your lender and explain that you are having temporary difficulties paying your car loan. Be prepared to explain why and what would be different in a month or two. The lender considers your payment history, your credit score and your reason for the request to determine whether it will grant you a deferral. You still need to make up the payments you missed, which would extend the length of your loan.

Sometimes, a deferral option is written into the car loan agreement. If you need to use that option, you go to the lender who calculates when your payments will be due and whether you will pay extra for this service. Get the forbearance agreement and your new payment schedule in writing; otherwise, you could be subject to repossession.

If you can sell the car for more than what you owe, consider doing so, especially if your future financial outlook looks bleak. You can pay off the too expensive car loan and get yourself something cheaper, or you can start buying bus tickets. This prevents repossession and keeps your credit score intact, which is important when you want to get another loan someday.