Deferring a personal loan payment represents postponing outstanding loan liability for a particular time. Usually, loan deferment happens for several months and requires the lender’s approval.
Typically, you can defer installment loans such as personal term loans, student loans, mortgage loans car loans, etc for an agreed period.
Making a loan deferral would offer you a pause in making monthly payments. However, depending on your debt type and clause, there can be interest accrual.
Interest accrual means that the lender will keep adding the interest with the balance amount of your loan during the deferred months.
Loan deferment does not severely impact credit score unless there is a mismatch between your lender and the credit bureau.
When can you defer a personal loan?
Personal loan deferrals usually happen due to financial hardship, natural disasters, education training, and other duties such as training or military duty.
Usually, you can defer a personal loan on the following grounds:
- If you lose your job or experience a significant reduction in income, you might qualify for a deferment.
- Significant medical expenses or health issues can qualify you for deferment.
- In the aftermath of natural disasters, lenders might offer deferment options.
- Situations like a death in the family or unexpected major expenses might also qualify.
- If you are called to active military duty, lenders often offer deferment options.
- Situations where you are unable to meet basic living expenses may qualify you for a deferment.
- Some lenders offer deferment if you return to school or enter a training program that impacts your ability to repay the loan.
How to do a loan deferment?
To make a loan deferment, you need to contact your lender, explaining the reasons for not being able to make future payments. Upon a review and cross-verification, your lender will inform you formally about the deferment decision.
You need to review the deferral terms and cross-check the clauses of the next payment date and the policy of the interest accumulation as well.
Follow the below steps to make a loan deferment:
- Reach out to your lender as soon as you anticipate financial difficulties. Early communication can provide more options. Try to reach out before you miss any payments.
- Provide detailed information about your financial situation or the specific reason for needing deferment.
- Be prepared to provide documentation supporting your request, such as proof of unemployment, medical bills, or military orders.
- Understand the terms of the deferment, including how long it lasts, how interest will be handled, and any fees involved.
- Ensure you receive written confirmation of the deferment agreement, including all terms and conditions.
What are the impacts of deferring a loan?
A loan deferment would usually have two impacts, one with the additional interest and the other with the credit score. Typically, installment loans would accrue interest during the deferment period (except for a few exceptions such as an education loan).
Normally, deferring an installment would not harm your credit score since no lender reports to the credit bureau about your inability to make payments, and during the deferment, your account will be labeled as current or in deferment status. However, stopping monthly payments based on the assumed deferment can significantly affect the credit score.
How does interest accumulation happen during a loan deferment?
During a loan deferment, interest accumulation occurs because, while payments are paused, the interest on the loan continues to accrue unless otherwise specified by the lender. This means that the unpaid interest during the deferment period is added to the principal balance of the loan, increasing the total amount owed.
For example, if you have a personal loan with a principal balance of $10,000 and an annual interest rate of 6%. If you defer your loan payments for one year, the interest for that year would be $600 (calculated as $10,000 * 6%).
Since you are not making any payments during the deferment period, this $600 of interest would be added to your principal balance, resulting in a new loan balance of $10,600 at the end of the deferment period.
Once you resume the loan, the accumulated interest will be added to your monthly payments gradually.
How does loan deferral affect credit score?
Since deferment is a mutually agreed pause or reduction in payments, it allows you to maintain a positive payment history without harming your score.
However, if you miss payments before arranging a deferment, those late payments can negatively affect your credit score.
Also, the interest accumulation during the deferred period will make your loans bigger, which impacts your DTI ratio and subsequently affects your credit score slightly.
We suggest you monitor your credit report after a month of your deferment to see any information mismatch. It will allow you to rectify them as soon as possible.
Loan Deferment Calculator
Calculate how much interest would you accrue for deferring your loan.
What loans cannot be deferred?
Certain types of loans such as credit card debts, payday loans, and standard mortgages, will not have deferral options.
Credit card debts are unsecured debts and you must need to make minimum payments. Banks or card companies earn heavily because of your inability to make cash transactions.
Similarly, payday loans cannot be deferred as well since the nature of the loan inherits high interest for a short time and strict repayment terms.
Standard mortgage loans do not typically have deferment options. Instead, lenders might offer forbearance or loan modifications. Forbearance is almost similar to a deferment but, the term forbearance represents your interest will accumulate and there should be strong evidence of a significant reduction of income.
What are the differences between deferment and forbearance?
Both deferment and forbearance allow you to pause your loan payments for a certain time. Deferment requires you to meet specific conditions such as unemployment or active military duty whereas forbearance allows you to temporarily reduce or suspend the loan for a certain time with accumulated accrued interest.
In deferment, certain types of loans do not have interest accrual such as subsidized student loans or loans taken by military professionals. However, in forbearance, there should be interest due for the time you are stopping the loan payments.
Typically, forbearance is much more flexible and easy to avail since your lender gets paid with additional interest. But, there should be strong evidence to get a deferment approval. The evidence needs to prove that you either not earning for a certain time due to a specific reason supported by the evidence.
Below is a side-by-side comparison table for your easy understanding:
| Aspect | Deferment | Forbearance |
|---|---|---|
| Definition | Temporary postponement of loan payments | Temporary reduction or suspension of loan payments |
| Eligibility | Specific conditions (e.g., school enrollment, unemployment, economic hardship, military duty) | More flexible, generally for financial hardship, medical expenses, employment changes |
| Interest Accumulation | Does not accrue on subsidized federal loans | Accrues on all loans, including subsidized loans |
| Impact on Credit | Neutral or positive (if arranged properly) | Neutral (if arranged properly) |
| Duration | Typically up to 3 years, depending on conditions | Typically up to 12 months, renewable with limits |
| Long-Term Cost | Less costly for subsidized loans due to no interest accrual | More costly due to accrued interest on all loans |
What alternatives do you have to the loan deferment?
If deferring a loan is not an option, you can try loan modification, refinancing, debt consolidation, or hardship programs.
A loan modification (debt restructuring) refers to permanently changing the terms of the debt. You may request your lender to reduce your monthly amount and extend the loan tenure for additional terms. Once completed, a modified loan will be treated as a new loan and you need to make regular payments.
If your income is not sufficient to support your loans, refinancing can be an option. Refinancing refers to replacing your current loan with another from a different lender with a favorable interest rate and terms. However, if you have multiple loans, you may also try consolidating the loan by merging all under a single loan.
Different lenders may offer hardship programs for a reduction in payment and interest. Such programs vary from lender to lender and you need to qualify for each of them.
A debt relief program can also help you where a counselor assesses your loans and helps with either settlement or a debt relief plan depending on your financial stability and future goal.
You can also try the financial assistance program offered by non-profit organizations that provide temporary financial support without repayment. Depending on the eligibility and availability criteria assistance amounts may be limited.
Bottom line
Deferring a loan can be a strategic action if your financial hardship is supported by strong evidence. Through a deferment, you can easily postpone some of your loan installments but you may need to account for additional interest unless your loan is a subsidized one.
