Extension Fees Under Automobile Loans

In today's economy, making monthly payments on a car loan taken out several years ago can be increasingly difficult. More and more, consumers need additional time to make a payment.

We sometimes are presented with the question: Can a creditor charge a fee for extending or deferring a payment under an automobile loan? Yes, but only if the agreement for such extension or deferment is in writing and signed by the parties to the contract. Otherwise, the creditor cannot charge a fee.

The obvious follow up question is: How much can the creditor charge for extending or deferring a payment? It depends. If the contract includes a finance charge determined on the precomputed basis (i.e., the "Rule of 78s"), the charge may not exceed an amount equal to 1% per month simple interest on the amount of the payment or payments extended or deferred for the period of extension or deferral. If the contract includes a finance charge determined on the simple-interest basis, the charge may not exceed the lesser of $25 or 10% of the then outstanding principal balance of the contract.