Sunday, June 10, 2012

What Is a Deferred Car Loan?

Deferred car loans often address special circumstances for some borrowers. These loans have a special market that has special needs. Typically, they are targeted toward those who may have income, credit or other financial problems. In some instances, these borrowers may not otherwise qualify for car loans. Also, individuals facing unexpected financial challenges may utilize these loans. In such a case, a borrower may choose to have her loan restructured as a deferred loan to get through a difficult time.


CHARACTERISTICS OF DEFERRED CAR LOANS

A traditional car loan has equal monthly payments over a set period. The total payments equal the cost of the car. Each monthly payment consists of part principal payment and part interest. When the last payment is made, the lender releases the title to the borrower. At this point, the car is paid off, and the debt is satisfied. The borrower now owns the car free and clear.
By contrast, deferred loans many times do not have equal monthly payments. The total monthly payments may not equal the price of the car. In general, these loans consist of a series of equal payments and a final balloon payment. Some payments may be interest only. When payments are interest only, they do not reduce the loan balance. This means the principal payment is included in the final payment. Therefore, the borrower has a series of lower monthly payments and one large one at the end of the loan. The borrower does not own the car until all monthly payments, including the final balloon, are satisfied. Another variation of a deferred car loan allows the borrower to skip payments. The payments missed during the grace period are then added to the end of the loan. This modification extends the term of the loan.

USES FOR DEFERRED CAR LOANS

Deferred car loans are often used to qualify certain individuals who may not otherwise qualify for loans. The income requirement used by most lenders can prevent many low-income borrowers from qualifying for a car loan. Since deferred loans typically have lower payments, these borrowers may often qualify. Often credit requirements are not as stringent. These lenders are more willing to accept customers with lower credit ratings. However, the borrower should be aware that a lower payment means there will be a balloon payment. The borrower will not own the car unless the final balloon payment is made. Therefore, a lump sum payment will be required to own the car. The type of deferred car loan that allows a borrower to skip payments can help an individual who is having a temporary financial problem. This kind of loan allows someone facing an interruption of her income to maintain her credit rating and keep her car. However, the borrower needs to be aware that the skipped payment is not eliminated. It is deferred until the end of the loan. Even when payments are skipped, interest continues to accrue. Therefore, the borrower will eventually pay more over a longer period.
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