The material presented here is for educational purposes only, and is not intended to be used as financial, investment, or legal advice.
How Skipping a Loan Payment Really Works
Imagine this: You’re struggling to make your car payment this month. You open an email and BAM! There’s an offer to skip your upcoming loan payment. Time to celebrate, right?
Offers like these can be a lifesaver when you’re in a tough spot financially. But before you accept one, make sure you understand exactly how it works, and what you’ll be expected to do later.
To help you determine what’s right for you, we’re covering some of the basics of skip-a-payment options and how they typically work. Keep in mind that each lender is different, so your best option is to speak directly with a loan specialist to ask about the specific terms of the offer.
The Lowdown on Skipped Payments
Sometimes, lenders will offer customers in good standing the ability to “skip” one or more payments on a loan. These offers may be a one-time deal, or they may happen multiple times throughout the year (for example, Desert Financial has seasonal Skip-a-Pay options for select auto loan holders). You may be able to skip one month’s payment, or your offer may allow you to skip several months of payments.
- Skipping a payment doesn’t mean forgetting about it completely. You didn’t just win the loan payment lotto! The payment you skip is added later in your loan payment schedule.
- Skipping a payment doesn’t mean skipping out on interest! Interest still accrues on your account as usual during the skipped payment period and throughout the newly extended life of the loan.
If you take advantage of a skip-payment offer, you’ll owe more overall because of the extra interest that accrues. The good news is that accepting an offer to skip your payments won’t negatively affect your credit. As long as you make any upcoming payments as required by the lender, your credit will show that you’re paying as agreed.
There are two main types of skip-payment plans: deferment and forbearance. Let’s walk through each one.
What is a Deferment?
A deferment simply means that the payment(s) you skip are delayed until a later time. When? That depends on the lender. While many lenders tack skipped payments on to the end of your loan as extra payments (like with our Skip-a-Pay), other lenders may schedule the missed payment amount to be due sooner.
Let’s say your auto loan payment is $400 per month and you receive an offer to defer your payment. Here’s how a standard deferment might look:
Scenario #1: Deferment
You are currently scheduled to make your final auto loan payment in January of 2023. After you accept a one-month-skip offer, you will now make a final payment of $400 (plus any extra interest or balance you owe) in February of 2023.
The Difference a Forbearance Makes
Some lenders offer loan forbearance in times of crisis. A forbearance gives you a temporary pause on payments while you are experiencing hardship. You’ll have to contact your lender directly to request a forbearance because in most cases, this is not something that a lender will automatically offer or grant. You may be asked to provide proof of the hardship to your lender — documents showing a recent job loss or illness, for example.
Scenario #2: Forbearance
You are laid off from your job and are receiving unemployment benefits, which aren’t enough to cover your mortgage payment plus essential living expenses. You contact your mortgage lender to ask about a forbearance. After looking at your individual case, your lender grants a 6-month forbearance and allows you to make smaller mortgage payments during this time.
During the COVID-19 pandemic, new assistance programs and parameters have been introduced. Lenders are working hard to ensure that borrowers affected by the crisis are not required to make any lump sum payments of missed or skipped monthly payments during this time.:
For example, under Fannie Mae’s COVID-19 guidelines, homeowners impacted by the pandemic may be eligible for up to 12 months of reduced or suspended payments.
- Fannie Mae has suspended foreclosure sales and evictions for 60 days.
- Borrowers in forbearance will not incur any late fees during this time.
- Missed payments during the forbearance will not be reported late to credit bureaus.
Work with your lender one-on-one to negotiate the terms of your forbearance. Some forbearances require the borrower to make reduced payments or interest-only payments, while others suspend your mortgage payments entirely while you are in forbearance.
Don’t forget to ask your lender when your suspended payment amounts will be due. Remember, a forbearance doesn’t eliminate the payments you would owe during this time. You may have these “missed” payments added to the end of your loan period, or you may work with your lender on loan modifications that alter some or all of your remaining payment amounts.
An Exception to the Rule: Student Loans
Note that federal student loans work a bit differently than other loan types. With subsidized federal loans and Perkins loans, you will not accrue any interest during a deferment. You will, however, continue to accrue interest on any unsubsidized federal loans.
Interest accrues as usual with a forbearance, so you will end up owing more overall and have the payments you skipped added to the end of your loan. Federal student loan forbearance is limited to 12-month periods. Deferments of these loans can last longer and typically require a qualifying event such as unemployment or documented financial hardship.
The Final Word
The bottom line: Know what you’re getting into. Deferment, forbearance and skip-payment offers can be worthwhile as long as you understand exactly how your offer works and when you’ll be required to pay. Accepting these offers won’t have a negative impact on your credit, as long as you make the required payments later on.
While deferment and forbearance aren’t long-term solutions, they can certainly help you stay afloat in times of crisis or personal emergency. You’ll pay extra interest in the long run. But for many people, spending a little extra money later is better than risking damage to your credit and potentially losing a lot more now.