Key learning points
-
Deferrals can temporarily pause your loan payments while your bills remain current.
-
Lenders usually ask for proof of financial hardship to approve you for loan deferment.
-
Although payments are not required, interest may continue to accrue. This may result in higher payments when the deferment ends.
Financial problems can make it difficult to pay back loans. Forbearance is an option that allows you to temporarily pause your loan payments with lender approval. While it’s a short-term solution, delaying your payments can help keep your accounts in good standing while you get back on your feet. However, this option is not guaranteed for everyone. To get approval, you must meet certain criteria.
What is loan deferment?
Loan deferrals allow borrowers to delay their payments for a specified period of time. This can vary from one month to several months, depending on your lender. Deferrals are typically available for installment loans such as personal loans, student loans, car loans, and mortgages.
How personal loan deferment works
You must contact your lender and explain your situation to obtain a personal loan deferment or another type of loan. Although each lender has its own approval requirements, you may qualify for forbearance if you experience the following:
- Financial problems due to reduced hours or job loss.
- Economic problems due to medical reasons.
- Hardship resulting from a life-changing event, such as the loss of your partner’s income.
Some lenders may also require you to provide evidence of these circumstances in order to approve you for loan deferment. That said, you are still responsible for making payments until your request is approved. For example, if you request a deferral on February 1 and your payment is due on February 5, you still need to make that payment. Otherwise, you may face late fees and other consequences.
If your request is approved, you will receive a letter explaining the terms of your payment deferral, including details about interest accrual and when your next payment is due.
Does deferment of personal loans affect your credit score?
Forbearance is basically a tool to help keep your loan account in good standing while you are in dire straits. This means your credit will not be negatively affected just because your loan is in deferral. If you stop making payments before your request is approved, your credit score could take a hit if the lender reports a late or missed payment. Be sure to check the status of your deferment and when it should take effect to avoid any unpleasant surprises.
How interest works during deferment
With the exception of subsidized federal student loans, interest and fees generally continue to accrue during the deferment. This may cause your monthly amount to increase once the deferment period ends.
Alternatives to deferral of personal loans during financial difficulties
While deferral is an option during financial difficulties, there are other ways to make your loan payments more manageable, including:
Loan change
Some lenders allow you to change the terms of your loan to lower your monthly payment. This is usually done by extending the length of your repayment term. This may result in paying more interest over the life of the loan, but it can be a good option if you’re unsure when you’ll be back on solid financial footing.
Refinancing
By refinancing your loans, you essentially take out a new loan with new terms and interest rates to pay off your old loan. You can refinance the loans individually or combine several with a debt consolidation loan.
This allows you to reduce your monthly costs by extending your repayment term or guaranteeing a lower interest rate. However, for this to work, you need a strong credit score and a stable source of income. Otherwise it might not be worth it.
Seek help from a credit counselor
If you’re deep in debt and don’t know the best payment management option, consider contacting a credit counseling agency. These organizations help consumers come up with a plan to effectively tackle debt based on their financial circumstances. You can usually access these services for a small fee or even for free, depending on the agency.
it comes down to
Personal loan deferrals allow you to keep your account current while temporarily pausing your payments. It can be an effective personal loan management strategy if you need a short break from payments.
That said, this is a short-term solution designed to help you in a time of financial need. Do you see your situation lasting longer than a few months? Asking for a loan modification, refinancing, or working with a credit counselor may be a better solution.
