How Does Car Loan Forbearance Affect Credit?

What Is Car Loan Forbearance?

Forbearance is short-term payment relief, granted by a lender at their discretion, to a borrower facing temporary financial difficulty. The way forbearance works varies depending on the type of loan in question.

In the case of a car loan, forbearance is typically synonymous with loan deferment (as well as loan extension, skipping a payment and payment postponement).

Example: If funds are unexpectedly tight this month—maybe your car needed a major fix or your fridge needed replacement—you may be able to buy some financial breathing room by using payment deferment to skip this month's car payment. If your lender allows this, the skipped payment will be tacked on to the end of your loan term, extending your repayment period by one month for each deferred payment, and increasing the total interest charges on the loan accordingly.

Permission to defer a car payment isn't guaranteed. Some car loans enable payment deferment via a "skip a payment" option on their online dashboards or smartphone apps. Others may require a formal written request known as a hardship letter.

Tip: Auto lenders that allow payment deferment may limit the number of payments you can postpone over the life of the loan or the number of payments in a row that you can defer. (Many allow a maximum of three consecutive deferments.) Lenders also may charge a fee for each deferred payment.

In rare instances, a different type of forbearance may be available on a car loan.

Under this arrangement, which is more typically applicable to mortgages than to auto loans, the lender grants a reduction or suspension of payments for an agreed-upon number of months. When this relief period ends, you are expected to resume regular payments and to repay, with interest, whatever you didn't pay during the relief period.

Repayment may be made in a lump sum or a series of installments you pay in addition to your regular loan payments.

If you're considering car loan forbearance, consult your loan agreement or speak with a customer service rep at your lender to be sure you understand their policies and the costs involved.

Will Car Loan Forbearance Hurt My Credit?

If you get your lender's permission for payment deferment, your loan account should remain listed in good standing, with no effect on your credit scores.

If the lender notifies the national credit bureaus (Experian, TransUnion and Equifax) that one or more payments is deferred, your credit reports will reflect that. That won't affect your credit scores, but a lender checking your credit in connection with a new loan or credit application might see it as a sign of potential financial instability.

In the unlikely event you are allowed to set up forbearance with a prescribed relief period on your auto loan, there's a chance your lender will report your payments as delinquent even if you follow the payment schedule as agreed. That would have a negative effect on your credit scores. So when discussing your options, ask your lender how they report forbearance payments to the bureaus.

Can Car Loan Forbearance Help Improve My Credit?

As noted above, car loan deferment or forbearance may not affect your credit scores at all, but if it does, it'll likely cause them to decrease, not increase.

Still, they'll likely harm your credit less than missing a payment without your lender's permission. Going 30 days past due on a scheduled payment will cause your account to be flagged as delinquent, with major negative consequences for your credit scores—and nothing on your credit reports to indicate that you sought hardship relief.

Alternatives to Car Loan Forbearance

If you foresee trouble making your car payments and are ineligible for forbearance (or prefer not to pursue it), here are some other options to consider.

Change Your Payment Date

It may make your life easier for your budget to have your payment fall on a different day than it currently does. You can ask your lender if they'll change it. Maybe it'll help if the billing date falls closer to payday, or to have it align all your other bills. Many lenders will make the adjustment if you ask.

Refinance

If you have steady income but your car payment is just too much to cover each month, consider refinancing your auto loan. This involves taking out a new loan, with terms that reduce your payment amount. Depending on when you took out your original loan and whether your credit score has improved, you might even get a lower interest rate as well.

Even so, between origination fees and an extended repayment term that lowers your payments, you could end up paying significantly more for your car over the life of the loan.

Learn more: When Does It Make Sense to Refinance a Car Loan?

Sell the Car

You may be able to sell your car and use the proceeds to pay off the loan, if it's worth more than you owe on the loan. You'll need your lender's permission to do so, but, depending on how much you get for the car, you might clear enough cash to use as a down payment on a less expensive vehicle.

Transfer the Loan

If your loan agreement doesn't forbid it (and many do), your lender may allow you to identify a buyer who'll take over the loan from you and complete the payments themselves. Anyone doing so will have to meet the same borrowing qualifications you did when you took out the loan, and you'll need to communicate closely with your lender throughout the process.

Consider Voluntary Surrender

When the car is worth less than what you owe on it, or as a last resort if no other payment relief is available, your best recourse may be voluntary surrender—turning the car over to the lender before they repossess it.

If the lender gets less for the car at auction than the amount you owe on it, you'll likely be obligated to pay the difference, which is known as a deficiency balance. If you don't, the lender may bring suit against you or send the balance debt to a collection agency, which could damage your credit further.

A voluntary surrender appears as a negative entry on your credit report and may lower your credit score as much as a repossession would, but lenders checking your credit reports may view a voluntary surrender as a more responsible act than forcing the lender to seize the vehicle.

Learn more: What to Do if You Can't Afford Your Car Payment

The Bottom Line

Payment deferment, the most common form of car loan forbearance, typically has no significant effect on your credit. If you need a short break from your car payments, deferment can be a good option. Just be aware of its potential cost in higher interest charges and be sure to get your lender's approval in accordance with your loan agreement.

If you need longer-term loan forbearance or other hardship relief, reach out to your lender as soon as possible to give yourself the widest range of available options.