Have you heard the term “deferral” and are looking to understand what it means and how it works? Like all things finance it can be a bit confusing but worry not, you’ve come to the right place, this article will fill you in on everything you need to know about car loan deferrals.
What Is a Deferral?
It’s easiest to think of a deferral as a pause in your loan repayment. A period of time where you are not required to pay back any of the loan or interest, only like all things finance it’s not quite that simple. When the deferral period is over the money will still need to be repaid and interest rates may still apply while over the course of the deferral. Meaning afterwards you may end up owing more money than before.
If for example your loan is deferred for 2 months, you will not pay any of the loan back over those 2 months but the interest will still be applied to your loan for those 2 months, which will end up being a higher percentage than if you had paid those 2 months.
Why Would You Want One?
So what exactly is the point in this then? Seems like it just costs you more money for no real reason. Well the primary reason you might want to consider a deferral is if you’re not going to be able to pay the required payment for that month. Maybe you’ve had to pay extra on an unexpected or emergency purchase, or you’ve suddenly lost a source of income and need to defer until you find new employment.
How to Get A Deferral
The Deferral process generally isn’t too complicated though that may depend on who the loan is from. Generally you just have to ask and then fill in some paperwork. However, Not all loans offer this option. The lender’s deferral policy should be listed either in the loan agreement or somewhere on the company’s website. Some other lenders will require a justification for the deferral, while others will grant one for asking.
If after the agreed upon deferral period you still need more time, you may be able to ask for another one though most lenders have limitations on how much time someone can defer repayment which will again be specified on the loan agreement.
Does a Deferral Impact Your Credit Score?
Short answer: It does but not in the way you might expect. Credit Score is really impacted by what you repay. Deferrals aren’t really not paying a loan back, they’re just pushing that payment back to a later date, so your credit score isn’t negatively affected by deferring a loan.
However they may have the opposite effect, if you don’t pay a loan payment and you didn’t agree on a deferral, that’s really really bad for your credit score, so asking for a deferral when you know you can’t pay a payment could actually help your credit score.