Short answer: a skip-a-payment or deferral offer moves one or two monthly payments to later, but on most installment loans interest keeps building while you pay nothing. The CFPB says a payment extension "can significantly increase the amount of interest you owe and may also result in extra payments at the end of your loan term" (CFPB). It can still be the right call in a short hardship, if you know the price first.
How a deferral works
- Lenders set their own rules. Some limit how often you can defer, some only offer it if you are current, and some let you skip the whole payment while others only let you skip the principal and still collect the interest (CFPB).
- Most of these loans are simple interest loans: interest builds daily on the balance and is worked out each time you pay (CFPB). The longer the pause and the bigger the balance, the more interest builds.
- When payments start again, the first one goes first to the interest built up since your last payment. The CFPB found that one or more auto lenders told borrowers only that the loan would be extended and interest would accrue, and left this out, which it called a deceptive practice (CFPB Supervisory Highlights).
- The skipped payment usually does not disappear. It is added at the end, so the loan runs longer.
Worked example
Example only, our calculation: a $10,000 loan at 12% APR for 36 months, payment $332.14. Interest is counted monthly here for simplicity; a lender that counts by day gets slightly different cents. Each skipped payment is added to the end.
| Choice | Full payments | Months to pay off | Last payment | Total paid | Extra cost |
|---|---|---|---|---|---|
| No skip | 36 | 36 | $332.27 | $11,957.17 | None |
| Skip payment 2 | 37 | 38 | $138.51 | $12,095.55 | $138.37 |
| Skip payment 13 | 37 | 38 | $89.73 | $12,046.77 | $89.59 |
| Payment 13: pay interest only | 36 | 37 | $332.27 | $12,027.73 | $70.56 |
What the table shows:
- Skipping payment 13 costs $89.59 more in all. When payments restart, $141.12 of the next $332.14 payment goes to two months of interest and only $191.02 to the balance. A 37th payment of $89.73 is added at the end.
- Skipping early costs more: skipping payment 2 adds $138.37, because the balance is higher then. The CFPB makes the same point (CFPB).
- Paying just the interest ($70.56) in month 13 keeps the payment count at 36 and holds the extra cost to that amount.
- If the lender charges a fee for the deferral, add it. With a $25.00 fee (an example figure), skipping payment 13 would cost $114.59.
For how a longer term adds interest in general, see how to choose a personal loan term.
Questions to ask before you agree
- Is this a whole payment skip, or do I still pay the interest?
- Is there a fee, and is it paid now or added to the balance?
- How will my next payment be split between interest and principal?
- How many payments are added at the end, and what is the new last payment date?
- How will the account be reported to the credit bureaus while the payment is deferred?
- Can you send me the agreement and the new payment schedule in writing?
A schedule change made because you are behind on payments is not treated as a refinancing, unless the rate goes up or the amount financed grows beyond the unpaid balance plus earned interest and certain insurance (12 CFR 1026.20(a)(4)). That means you may not get a new Truth in Lending disclosure, so the written schedule from the lender is your record. Our guide to reading a loan disclosure shows what the original numbers mean.
When it can make sense, and other options
A one-time skip can be cheaper than a missed payment, which can bring a late fee and a late mark on your credit report. What a missed payment leads to is covered in what happens if you miss a personal loan payment. The CFPB also lists a change of due date if your pay date has moved, a payment plan if you are already behind, and refinancing (CFPB). Each can add interest over the life of the loan, so compare the totals. Whatever you choose, get the name of the person you spoke with and the agreement in writing, and check your credit report afterwards. If the lender does not apply the deferral the way it agreed, see how to file a loan complaint.
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Disclosure: Modern Lending Solutions is not a lender, loan broker or agent for any lender or loan broker, and does not make credit decisions. Any compensation we receive is paid by participating lenders, only for advertising services. This guide is general information, not financial or legal advice.
Sources
- CFPB blog: Worried about making your auto loan payments? Your lender may have options that can help (February 2020, archived)
- CFPB Supervisory Highlights, Issue 12 (Summer 2016, PDF): disclosure of payment deferral terms
- Regulation Z, 12 CFR 1026.20(a): refinancings, and changes that are not treated as a refinancing