As of Fall 2024, Americans owe about $1.6 trillion in car loan debt. We’ve reported many times that the average car payment is $723. If you struggle to make a payment or two, some lenders offer deferments. This is similar to a student loan or mortgage deferment, wherein you skip a vehicle payment or even multiple payments. In turn, the missed payments are added to the end of your car loan term. Unfortunately, though, some borrowers don’t clearly understand deferment terms and end up with a panic-inducing “balloon payment” at the end of the timeline.

In the past, lenders have gotten into trouble for misleading drivers about car loan deferments

Payment deferment is an option when folks who otherwise pay their bill on time come across a hardship preventing them from fulfilling their current loan terms. Unexpected illness, unemployment, and a natural disaster (like a hurricane) are some examples. In these cases, lenders might be open to the borrower skipping some payments and adding them to a final payment due at the end of the loan term.

The final payment, when deferments are included, is called a “balloon payment.” It includes all of the missed payments plus any extra fees associated with altering or extending the loan.

In September, ProPublica released an auto loan calculator that works in any extensions, including deferred payments. As part of its research into car loan deferments and their impact on consumers, it confirmed a history of “misleading behavior” lenders used to keep borrowers tied to unhealthy loans.

“In 2018, one lender got into trouble for allegedly misleading borrowers about them. We found another company, Exeter Finance, using similar extension practices, driving struggling people deeper into debt. These deferments especially affect those with bad credit, who often must pay sky-high interest rates to borrow money.”

Before agreeing to a car loan extension, understand the exact terms

ProPublica reported that many Exeter Finance customers who engaged in deferred payments didn’t exactly understand the lender’s terms. The balance between the loan’s interest and principal portions changed with the deferments.

In traditional car loans, the portion of each payment going toward loan interest reduces. In turn, principal portions increase. Each payment is exactly the same – say $415 per month – until the loan is entirely paid off.

With car loan deferments, many lenders increase the interest rate for the rest of the loan term. They also add extension fees to the end. Don’t forget about the skipped payments…those get added at the back, too.

So, borrowers under these modified terms often don’t understand that while a skipped payment might feel like immediate relief, they’ll soon be facing a large and often unplanned-for bill. If the borrower defers more than one payment, considering the average American car payment of more than $700, the balloon payment can easily creep into the thousands.

“These balloon payments caught a lot of Exeter borrowers we spoke to by surprise and caused them financial pain,” ProPublica reported.

Consumer advocates stress car loan literacy

After reading and covering dozens of stories reflecting “predatory lending,” like a Tennesee dealer signing up a 20-year-old unlicensed army private for a $900 BMW car payment, I can’t stress car loan literacy enough.

The problem, it seems, is often that folks just don’t know enough about navigating lending going in. Add a “motivated” car salesperson who works on commission and lenders benefitting most when folks remain in debt, and the consumer is just, well, set up for financial harm.

The National Consumer Law Center and the nonprofit Credit Builders Alliance work constantly to both inform and advocate for borrowers.

The director of the NCLC’s Working Cars for Working Families program says that if your loan terms weren’t working before any extensions, then consumers should understand that their car loan likely won’t work well under deferment terms, either.

Of course, talk of car loan literacy soon turns into a broader conversation about household finances in general. Realistic budgeting via a clear understanding of what you make each month (after taxes) versus your fixed expenses is typically a good place to start.

After that, thinking critically about what type of vehicle you actually need over any social pressure comes next. Will a brand-new luxury SUV best serve your financial health? Or would a used hybrid do the job?

As a car person, I completely understand the pull of a dream ride. However, a car should never be the root of anyone’s financial downfall. That’s simply not the point of them. If you’re on the road to financial stability, they should faithfully serve you in reaching your goals.