What Is Loan Deferment

Can you put a personal loan on hold?

Yes, most lending institutions understand that things happen in a borrower's life that may cause them to need to put a personal loan on hold. Whether you lose your job, have a death in the family, or a major medical emergency, some banks and lenders may have programs in place to provide you with temporary relief. For example, if you are simply in need of a few months of relief, some lenders may have short-term deferred payment plans. With a short-term deferment plan, you may be able to extend your loan term to allow you to stop making payments for a specified period of time. That period of time can vary from lender to lender; however, it may provide you the opportunity to catch up on some expenses and begin payments at a later date. You may or may not be charged interest during this period in exchange for the service, so it is best to consider this when consulting with a lender.

How does a deferred payment plan work?

Essentially, a deferred payment plan works when a lending institution is willing to make accommodations to help a borrower through short-term financial difficulties. This can be seen as a win-win situation for both the lender and the borrower because helping someone out on a short-term financial need may prevent a possible default on the loan. Financial institutions lose money when a loan defaults and borrowers can do some serious damage to their credit. It's quite simple. Monthly loan payments that cannot be made at the specified time can simply be tacked-on to the end of the loan repayment period. Although loan payments will not be being made during the specified time, the interest could still be charged.

How do you defer payment on a personal loan?

If you need to defer payment on a personal loan for any reason, the first thing you should do is start the conversation with your lender. Explain what is going on and why you may need to defer a payment, or a few. Depending on your situation, the lender can ultimately decide on how they may be able to help you. Each lender is different and it is important to know that they are not required to offer you a deferment. If you are denied a loan deferment there are many alternatives available that you may want to explore. But keep in mind, there are many lenders that may be willing to work with you to provide some short-term financial relief. In exchange for their services, a lender may continue to charge interest on the loan or require you to make a balloon payment at the end of the payback period.

What happens when you defer a loan payment?

When you defer a payment, you are making an agreement with your lender to make the payment you deferred at the end of the original term. When you go into a deferred payment agreement, you may want to be sure you know what you are bargaining for. Most lenders have pretty straightforward terms that are easy to understand, however, you may want to read all the fine print to make sure it is a good option for you. Every deferred payment agreement could be different, and it is up to the lender to explain it to you, but it is your responsibility to understand it. Although you may have to pay interest during the deferment period, it is almost always better to establish an agreement and pay the interest rather than receiving the missed payment on your credit report. Missed payments can have a detrimental effect on your credit score since they comprise 35% of your total overall score.

Does payment deferral affect credit score?

If you enter a payment deferral agreement with your lender it should not affect your credit score. The lender should be alerting all three credit bureaus that your loan is in deferment and that both parties have entered into an agreement. However, you may want to discuss this with your lender to ensure that they are properly following through with the reporting.
The timing of completing the agreement could also become a critical factor. If you know that you need a deferment you should make sure you give enough time for the deferment to be approved before the loan due date. If you do not allow enough time, you could potentially see a late payment on your credit report. If your credit is already fair or bad, any late payments can greatly affect your ability to get credit in the future. Even one late payment could drop a credit up to 100 points.

Is personal loan deferment bad?

Actually, personal loan deferments are generally not seen as a bad thing as long as all the proper steps are taken. Personal loan deferment should have no impact on your credit score and you can buy yourself some time to get caught up on other bills or cover the costs of a financial emergency. The only bad things about personal loan deferment are the extra interest you may accumulate, and the possibility of having higher monthly payments when you restart making payments.

Who is eligible for a personal loan deferment?

Most borrowers could be eligible for a personal loan deferment. The question is who your lender is and if they have programs in place to provide their borrowers with deferment options. Some lenders may not have any programs in place. Therefore, before you take out a personal loan with a certain lender, if you think you may need a deferment option sometime in the future, or just like that the option is there to give you peace of mind, then you may want to discuss deferment options with the lender before applying for the personal loan.

How do you qualify for a personal loan deferment?

Most borrowers should be able to qualify for a loan deferment, depending on the lender. The first thing you should do is start the process as soon as you know you may need it. Reach out to your lender and explain the situation and why you need a deferment. Most lenders can be understanding, however, the process can take a bit of time to be approved. You do not want to wait for the day before your payment is due to contact your lender. Even if you are approved for a personal loan deferment, if the approval happens after your payment due date, you could still see a late payment on your credit report.

Can you still make payments on a deferred loan?

Yes, even if your loan is deferred you still can make payments. You could consider simply making the interest payments to prevent them from increasing your monthly payments later down the road. Or if you have a sudden influx of money, you were not expecting, you may want to consider making the payment anyway. Essentially, the loans are yours to pay and lenders are not concerned about whether or not the loan is in deferment or not when you want to make a payment.

What are the advantages of a deferred payment plan?

There are many advantages to why someone may want to use a deferred payment plan for avoiding making a monthly loan payment. Here are just a few examples of how borrowers could benefit from a deferred payment plan.

— No impact to credit score: Deferred payment plans should not have any effect on your credit score as long as the lender properly notifies the credit agencies about the deferment agreement you have entered into. You may want to discuss this with your lender to ensure that they properly inform the credit agencies. It is standard practice but being thorough is never a bad thing.

— Avoid making a late payment: Any late payment has the potential to damage your credit. Payment history makes up about 35% of your overall credit score which can create some potential problems in the future when you want to apply for a new line of credit.

— Catch up on monthly expenses: Sometimes we can fall behind on normal bills like utilities, groceries, car payments, etc. and all we need is one month to get caught up. By using a deferred payment plan you can take some time to focus on other bills rather than your personal loan.

— Cover an emergency expense: Maybe you have a furnace or hot water heater that is about to go and you could use some extra cash to cover the expense? Maybe a family emergency requires a quick surge of liquidity? You could use a deferred payment plan to free up the money you need.

What are the disadvantages of a deferred payment plan?

Although there are many upsides to using a deferred payment plan, there are a couple of disadvantages that any consumer should be aware of. The main disadvantages include additional interest charges, larger monthly payments, and/or a large balloon payment at the end of the loan repayment period.

— Additional interest charges: When the loan is in deferment most lenders will continue to charge interest on the loan.

— Larger monthly payments: Depending on the terms of your deferred payment plan, you may need to pay larger monthly payments once payments recontinue on the loan.

— Balloon payment: Some lenders add larger payments at the end of loan repayment periods known as balloon payments.

Although these disadvantages may be somewhat undesirable, when you look at your financial situation the costs may be worth helping you through short-term difficulties like an emergency car or home repair, catching up on your monthly bills, or taking care of a medical or dental bill.

What happens when deferment ends?

Once your deferment ends, if you are still having trouble paying the loan you may be able to ask for an additional deferment. Whether or not you can get one is up to the discretion of the lender. Otherwise, payments should go back to normal with the accrued interest calculated. Depending on the terms of the deferred payment plan, you may have larger monthly payments, be asked for an upfront payment of the accrued interest, or receive a balloon payment at the end of the loan term. If you are unable to make the new monthly payments, then you may have to look into alternative arrangements and reduce overall spending to be able to keep up on the monthly payments. Late or missed payments, and even default, come with dire consequences.

How is interest calculated on a deferred payment plan?

When your deferment period is over, the interest accumulated during that period can be added to the updated loan amount. The interest rate does not change during the deferment period, however, since no payment was made you may accumulate a little more interest than if you would have made the payment.

What are alternatives to personal loan deferment?

Personal loan deferment plans are used by many Americans every day to help with cash flow issues, however, they may not be the best option for your personal needs. It is always in your best interest to explore all options on the table. Maybe you were already looking to refinance your mortgage. You may want to consider a cash-out refinance to help keep on top of your personal loan payments and/or monthly expenses. This is just one example of many others. Here are a few other alternatives to a personal loan deferment plan.

— Personal loan refinancing: Many people choose to refinance personal loans due to the highly competitive nature of the lending market. If you can find an alternative lender who can help you refinance your current personal loan at a lower interest rate, this may be a great option. The only risk is tacking on more debt by asking for a larger amount or your loan repayment period gets extended.

— Modified payment plan: Some lenders may be willing to offer you a modified payment plan rather than risk you going to an alternative lender for refinancing. Or you may be able to refinance with your current lender if your credit is good or excellent. A modified payment plan extends the loan's repayment period. This can be a great option but it can increase the amount of interest you will be required to pay over time. It will lower your monthly payments which can help solve your financial problem.

— Find a reliable credit counseling service: There are many non-profit organizations that work with individuals to help them with personal loans and credit repair.

A few other alternatives you may want to consider may be asking a friend or family member for a short-term loan to get you back on track. The only risk to that alternative is that if you are unable to pay back the friend or family member, you could risk your personal relationship.