Does Car Loan Forbearance Hurt Your Credit Score?

Financial setbacks can happen for many reasons, such as losing your job or suffering an unexpected medical issue that forces you out of work. If you’re struggling to make your car loan payments, your lender may offer forbearance as a temporary solution.

A forbearance agreement can give you some much-needed breathing room, but many borrowers worry about how it could affect their credit.

The good news is that your score won’t automatically take a hit when you sign up for car loan forbearance. How your lender reports the account and how you manage your loan before, during, and after forbearance can make a huge difference.

Learning how car loan forbearance credit score reporting works can help you avoid unnecessary damage and protect your financial future.

Does car loan forbearance hurt your credit score?

The answer depends on how you and the lender handle forbearance. In many cases, it won’t hurt your credit score. If your lender approves your forbearance request before you fall behind on payments and reports the account correctly, your credit score may not be impacted.

However, every lender has its own policies, and not all programs run the same way. If you fall behind on payments and your lender reports them as late to the credit bureaus before your forbearance agreement takes effect, your score will drop. Likewise, if you or the lender does not follow the terms of the agreement, your score could be impacted.

How forbearance is reported to credit bureaus

A forbearance agreement changes the payment expectations for a short time. During that time, your lender may report the account in several different ways, depending on the structure of your agreement. Here are some common reporting methods:

• Current and paying as agreed
• Current with a notation that the account is in forbearance
• Deferred payment agreement
• Special payment agreement

As long as the lender reports the account as current under the agreed terms, your payment history remains intact.

When forbearance can hurt your credit

Filing for forbearance doesn’t automatically damage your credit. However, you could see a drop in your score if one or more of the following occur:

• You enter forbearance after missing payments
• Your lender reports late payments
• You don’t follow the agreement
• You struggle to catch up after forbearance ends

Make sure you are aware of these risks when deciding whether to request forbearance from your lender.

When forbearance protects your credit

For many borrowers, forbearance helps protect their credit by preventing missed payments when they are experiencing temporary financial hardship. A properly managed forbearance can help you:

• Avoid 30-, 60-, 90-day late payment reports
• Prevent collection activity
• Keep your loan in good standing
• Buy time to recover

The biggest benefit is preserving your payment history while you work through a short-term financial challenge.

How car loan forbearance works

Car loan forbearance is a temporary agreement between you and your lender that allows you to pause or reduce your monthly payments for a specified period. The payments don’t disappear. You’ll still owe the money later.

Events that lenders typically consider when reviewing a forbearance request include:

• Job loss
• Reduced income
• Medical emergencies
• Natural disasters
• Family emergencies

Your lender is not legally obligated to approve all forbearance requests.

What happens to your payments during forbearance?

There are a few ways that lenders may structure a forbearance agreement. Usually, you’ll be able to skip your payment entirely for a few months. Other times, lenders may reduce your monthly payments instead of pausing them completely. You’ll continue accruing interest during the forbearance period.

The missed payments have to be repaid in one of three ways. You can:

• Add the payments to the end of the loan
• Repay what you missed through higher monthly installments
• Owe the lender a lump sum

The repayment terms are outlined in the forbearance agreement. Find out which method your lender requires.

What happens after forbearance ends?

After the forbearance period ends, you’ll resume making your normal monthly payments. If the agreement includes repayment via a lump sum, you’ll have to pay that amount by the deadline.

Car loan forbearance vs. other options

If you are having trouble making your vehicle payments, there may be other options instead of forbearance.

Forbearance vs. deferment

Deferment and forbearance are similar, but there are a few variations. When you enter a forbearance agreement, your payments are temporarily paused, but interest still accrues. If you qualify for deferment, your lender may or may not continue adding interest. There are different conditions for deferment vs. forbearance.

Forbearance vs. loan modification

A loan modification permanently changes the terms of your loan. Possible modifications include:

• Lower monthly payment
• Extended repayment period
• Reduced interest rate
• Adjusted payment schedule

A loan modification usually lasts the length of the loan.

Forbearance vs. missing payments

Simply missing payments without talking to your lender is usually the worst option. When you miss payments, you could rack up late fees and damage your credit score. Eventually, the lender will repossess the vehicle if you don’t make payment arrangements.

How to minimize credit damage during forbearance

If you need to request a forbearance of your car loan, there are ways you can minimize the impact to your credit score.

Request forbearance before you miss a payment

Don’t wait until you are late making a payment. If you know things are going to be tight and you won’t be able to pay your auto loan for one or more months, reach out to your lender.

Get the agreement in writing

You need a written breakdown of the agreement, including when it starts and ends, as well as how payments will be handled. Save the confirmation information for your records so you can refer back to it as needed.

Monitor your credit reports

Keep an eye on your credit reports and score to confirm that the lender is reporting your activity as agreed. You don’t want any surprise hits to your score.

Build positive credit history elsewhere

Even if your auto loan is temporarily paused, you can strengthen your overall credit profile. A few good habits to build include:

• Pay all other bills on time
• Keep your credit card balances low
• Avoid unnecessary new debt
• Use credit responsibly

You may also benefit from a credit-building account.

Car loan forbearance credit score implications

If you’re concerned about car loan forbearance credit score impacts, communicating with your lender early is vital. Be proactive while you work through your financial challenges, and get back on track with payments as soon as possible.

Forbearance is a tool that can provide much-needed financial relief when you are in a crunch. Use it wisely.

You could also sign up for a credit-building account with Kikoff. Our platform includes a variety of tools that add positive payment history to your credit report. Sign up for Kikoff today.