Deferred Payments: Read the Fine Print

CARS.COM — Auto loans can be a difficult world to navigate, especially with so many variables to consider: the loan amount; the loan balance after payments; the penalties if a borrower skips a payment; where to finance; what you can afford to pay per month; and numerous other options. Some loan plans even give the borrower the option to defer making payments on the vehicle for a set amount of time.

Sounds pretty good, right? Not so fast.

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Make sure you read the fine print. Deferred payments might seem like a win-win, but the terms can vary — and the details make a big difference in how smart it might be for borrowers to put off those payments.

Not All Programs Are the Same

Such offers have “been around for several years,” says Sherralyn Peterson, an incentives consultant who works with GM, Ford and Mazda dealerships.

Other experts told us such offers have entered the market to lure shoppers with poor credit. They aren’t necessarily a good move, but they can be worthwhile as long as you know what you’re getting into.

We sorted through a range of previous offers. Here’s what we found.

Deferred Payments, Not-So-Deferred Interest

The vast majority of deferred-payment programs don’t give you a holiday from your car loan’s interest. Many automaker offers that have payments deferred, like most offers from other lenders like local or federal banks and credit unions, start accruing loan interest from the day you buy the car, not the day you make your first payment. And that has a price.

How much? Consider a 60-month loan on $25,000 at 4 percent interest. A three-month deferral could add well more than $200 to your loan principle by the time you make that first payment. You won’t have to pay it up front because it typically gets absorbed into a new loan schedule. But you’ll pay it over time.

Lenders “just push the whole cash-flow structure back by three months or whatever, [so it] goes from month three to month 63 instead of now to month 60,” explained Greg McBride, chief financial analyst at Bankrate.com. “Your total interest tally is going to mount, so you’re very clearly paying for that convenience.”

Zero Percent, Zero Interest

A Labor Day Sale from Chevrolet offered 90 days’ payment deferral with zero percent interest, GM spokesman Jim Cain said. But if you didn’t have the credit to qualify for that — and the vast majority of Americans don’t — then GM has other incentives that don’t involve a payment deferral.

But let’s say you do qualify for zero percent. That means a payment deferral costs nothing in interest, and if you kept that car-payment money in your bank account for three months, it could set you up with extra cash for repairs or maintenance down the road.

Katie Moore, a financial counselor at Michigan-based GreenPath Debt Solutions, is skeptical of most deferred payment programs. But she admitted these “could work” for disciplined consumers.

It’s a chance “to put those three payments in the bank and save for emergencies, car repairs, new tires,” Moore said.

An interest-free loan deferral could also allow you to put any money you would have spent on car payments into your investments, and shifting the payments backward could work in your favor.

But few Americans are financially positioned to do that. “The time value of money really only comes into play for 5 percent of the population,” Bankrate.com’s McBride said. “And you know what? They’re the 5 percent that could afford to buy a car no matter what.”

Payment(s) Waived

A few programs defer payments by waiving them altogether. Take Volvo’s Wonder of Summer event, which deferred your payment for a month by eliminating it. Essentially it pays out a cash incentive that’s worth your first month’s payment, and given you don’t have to make anything up on the back end — a 60-month loan simply becomes a 59-month loan, with those 59 payments unaffected — it’s more of a no-brainer.

These are “basically just longer-term rebates,” Sam Fiorani, vice president of global vehicle forecasting at AutoForecast Solutions, told us via email. “Instead of ‘buy a car, get a check,’ it becomes ‘buy a car and we make the first [one, two, three, etc.] payments.’ “

Automakers sometimes offer this on lease payments, too, dealer consultant Peterson added. Some will even pay off your final two or three lease payments if, say, your existing lease isn’t up for another few months.

Automakers “would ‘target’ certain models or vehicles with a specific lease ‘scheduled end date,’ ” Peterson said. “Of course, the customer would have to qualify.”

‘Red Flag’

Such payment waivers are rare, however. Most deferral programs charge you interest during the deferral period. Because cars typically depreciate the most early on, they risk putting you upside down — where you owe more money on your car than it’s worth — for an even longer stretch of the loan.

“If you want the car loan, not only should [you] be ready to make that payment, but to make a down payment — the budget should be there,” GreenPath’s Moore said. “For most Americans, they would say, ‘Oh great, three more months of not having to make that car payment.’ … If that’s an incentive to them, then maybe it’s more of a red flag that the car is maybe not affordable for you for the next five years.”

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