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Loans with deferred payments allow you to postpone monthly payments without incurring late fees or damaging your credit. If a financial hardship is affecting your ability to make payments on a personal loan, you may be able to qualify for deferment.Whether you are struggling financially because of rising costs, job loss, or a medical emergency, deferring personal loan payments helps you rebuild your financial foundation.Here’s how the process works and what you need to know.
What Is Loan Deferment?
A loan deferment is when your lender agrees to delay your loan payments by a specific number of installments. The deferment allows you to skip those payments without incurring late fees, going into loan default, or hurting your credit.You can qualify for personal loan deferment based on your lender’s requirements. Depending on the personal loan you pick, those may differ, but typically, you will need to show that you’re going through hard times financially and cannot afford to make your monthly payments.There is generally no requirement for your lender to give you a deferment. However, most lenders offer deferments for struggling borrowers because it’s more cost-effective for them to work with the borrower than to send the account to a collection agency.
How Does Loan Deferment Work?
To receive a personal loan deferment payment, the first step is to communicate with your lender. Contact them and explain the reason you’re requesting a deferment, such as an expensive medical bill or the loss of employment, and your lender will decide whether to defer your loan. If the lender approves the deferment, you won’t have to pay the loan for a set number of months. Your lender will add the deferred payments to the end of your loan.A loan deferment can provide tremendous relief, but it’s crucial to understand when the deferment goes into effect and when it expires. For example, let’s say it’s August, and you have a vacation loan that you are scheduled to pay off the following June. You request a deferment from your lender, and they approve a one-month deferment that applies to your September payment. As a result, you still must make your August payment, but you get a break from paying in the month of September. However, you need to resume payments on your deferred personal loan in October.Every lender has a different policy for deferments. Some will approve a deferment for just one month at a time, while others may approve several consecutive months. Unless your lender specifically allows only one deferment per borrower, you can typically request multiple deferments.
Calculating How Much Deferment Will Cost
A personal loan with deferred payments comes with a price. During the deferment period, interest will continue accruing on the balance. Additionally, your lender will add the deferred payments to the end of the loan, extending the life of the loan by the number of payments delayed.You can look at your last loan statement for more information. Your statement will show how much of your monthly payment goes toward the principal of the loan and the amount that goes to interest. The interest will keep accruing during deferment and your lender will add it to your loan. You’ll pay for it later, once you start making payments again.
Does Deferring a Loan Affect Your Credit Score?
A personal loan with deferred payments will not negatively impact your credit score. All lenders submit monthly reports to the major credit bureaus about the payments made on your debts. Payments that are late or missed will reduce your credit score. However, deferment is a separate category — the lender will report your payment as deferred, which doesn’t harm your credit. Even though a deferred personal loan isn’t detrimental to your credit score, missing payments after the deferment will hurt your credit. Be sure to start making your payments again on schedule.
Possible Negative Effects
Deferring your personal loan might cause you to forget to make a payment when the deferment is over, and that can damage your credit. Additionally, since lenders typically allow interest to accrue during the deferment, your monthly payment could increase.
Possible Positive Effects
Deferment can help you navigate financial trouble while preventing late fees and keeping your credit from being negatively affected. The deferment period can be a good time to recalibrate financially, save up some money, and get ready to resume monthly payments on your personal loan.
Deferment vs Forbearance
The terms “deferment” and “forbearance” are sometimes used interchangeably, but there are key differences between the two. Here is a breakdown of what they each do:
Deferment
Forbearance
You don’t have to make payments for the specified period. Interest will accrue.
Your lender delays or pauses your payments while charging interest.
You can pay the interest during the deferment or add it to the balance due once you resume payments.
You can pay the interest during the pause or add it to the balance due once you resume payments.
Lenders have standards for borrowers to qualify for deferment.
Lenders have standards for borrowers to qualify for forbearance.
Federal Loan Deferment
A broad range of federal loan products may have deferment options. Borrowers with loans owned by Fannie Mae or Freddie Mac, FHA loans, VA loans, and USDA loans may have deferment options. In the case of student loans, the nationwide moratorium on federal student loan payments ends Aug. 30, 2023. As a result, student loan interest will resume on Sept. 1, and payments will be due starting in October 2023.
Private Loan Deferment
The CARES Act does not extend deferment to private loans. However, it’s a good idea to check with your lender about personal loans that can be deferred or granted forbearance. Often, lenders will assist borrowers who are going through financial hardship.If your private lender doesn’t offer any way to delay your payments, one option is to look into how to refinance a personal loan. Numerous companies refinance personal loans and may offer you a better interest rate, lower monthly payment, or deferment.
Credit Card Deferment
Credit card debt can also be difficult to pay off if you’re going through financial hardship. Unfortunately, not all credit issuers offer deferment, but it’s worth talking to your credit card company to ask about any relief programs they might have.
Alternatives to Loan Deferment
Loan deferment can help you dig yourself out of a financial hole, but there are other options to consider, especially if your lender doesn’t offer deferment.
Modified Payment Plans
If you’re concerned about your ability to afford your loan payment going forward, a modified payment plan could help. Modifying your loan usually means lowering your monthly payment and extending the life of the loan. This adjustment will make your payments more affordable, but the loan will cost more overall because you’ll be making payments for a longer period of time.
Refinancing Your Loan
Refinancing means replacing your existing loan with a new loan. Refinancing can be worth it if you find a lender who offers more flexibility and assistance in times of hardship. Plus, you may receive better loan terms with the new loan if you have a high credit score.
Confer With a Credit Counselor
If your personal loan payments are unaffordable, and your lender won’t help you, a credit counselor could assist in getting your debt under control. Credit counselors have knowledge and resources beyond deferments. However, beware of scammers who defraud consumers looking for credit relief. One resource you can try is the National Foundation for Credit Counseling, a nonprofit that provides assistance for people with credit problems.
Default
Loan default means that you stop repaying the loan altogether. You should try to avoid defaulting if at all possible. In addition to the late fees that will build up, when your lender puts your loan in default, they will seek repayment from you through their collection department or an outside collection agency. In addition, if you put up collateral for the loan, your lender has the right to seize it. Thus, defaulting can devastate your credit, making it challenging to get a loan in the future and causing lenders to charge you higher interest rates. Defaulting can also result in a lawsuit or your lender going after your loan cosigner (if you have one).
The Takeaway
If you are struggling to make personal loan payments, you may want to consider deferment because it can give you time to improve your financial circumstances. In addition, deferment does not hurt your credit score. Just be aware that interest may accrue over the deferment period, which means you’ll end up paying more money in the end. But if it saves you from defaulting on the loan and damaging your credit, deferment could well be worth it. If you’re looking for a personal loan to help address debt or finance a new project, you’ll want to find one with the best terms and rates for you. Lantern by SoFi can help. You can easily compare loans on our marketplace to find one that’s the right fit for your situation.
Frequently Asked Questions
Can you make payments on deferred loans?
Do deferred payments hurt your credit score?
What is a deferred payment loan?
Is loan deferment bad?
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About the Author
Ashley Kilroy
Ashley Kilroy is a personal finance expert with years of experience in radio, newspapers, magazines, and online content. Her work has appeared on websites including Forbes and Yahoo Finance. Ashley writes on a variety of personal finance topics for SoFi, including student loans, taxes, and insurance.
