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What Is Loan Deferment and How Does It Work? | Personal Loans and Advice
If you’re having trouble repaying your loan as promised, requesting a loan deferment might help you temporarily pause or reduce payments. Plus, it can help you avoid late fees and damage to your credit.
But before you apply for deferment, you should consider potential drawbacks, such as higher total borrowing costs. Keep reading to learn how a deferment works, the pros and cons and alternative solutions.
What is a Deferred Payment?
During deferment, a lender allows you to temporarily skip payments without facing negative consequences like paying late fees. You’re still responsible for making these payments at a future date.
For example, if you get approved for a six-month deferment, the lender will typically add six additional monthly payments to your repayment term.
How a deferred payment works and how long it typically lasts vary depending on the lender and the type of loan you have.
- Auto loans. Deferments for auto loans are sometimes called loan extensions and typically range from one to three months.
- Student loans. Student loan lenders generally allow you to defer payments while you’re in school. Some lenders may also offer other types of deferment, like financial hardship deferment and military service deferment.
- Mortgages. If a mortgage lender offers deferment, it will typically allow you to postpone payments for three to six months.
How Do Deferred Payments Affect My Credit?
Deferred payments have no direct effect on your credit score. But note that if your loan is delinquent before being approved for a deferment, it can still cause harm to your credit since the lender may report your delinquency status to the three major credit bureaus: Equifax, Experian and TransUnion.
As a result, it’s crucial to continue repaying your loan according to your original loan agreement until your deferment request is approved.
“Monitor your credit reports and credit score during and after the deferment process since lenders sometimes report inaccurate information to the credit bureaus,” says money coach and certified financial planner Ohan Kayikchyan.
Note that a “free credit score” website may earn money from advertisements or only offer a free trial period, according to the Consumer Financial Protection Bureau. The CFPB recommends that you understand how they work and how they make money before creating an account with one of these sites.
How Does Deferment Affect the Overall Cost of My Loan?
“If interest continues to grow on your loans during deferment, it will increase your total borrowing costs,” says Kayikchyan.
How much interest a lender charges you during the deferral period depends on several factors, like your annual percentage rate, outstanding balance and how long your deferment lasts. For example, if your outstanding balance is $20,000, the deferment period is six months and APR is 8%, you may pay $469 in additional interest over the life of the loan.
How to Defer a Payment
If you’re having trouble making monthly loan payments, take these steps.
- Contact your loan servicer or lender. First, contact your lender to see if it offers deferment.
- Apply for a deferment. Some lenders may require you to submit a deferment request form. A lender may ask you to provide your personal information, the reason for deferment and supporting documentation, such as a military active-duty order if you listed military duty as the reason for deferring your payments.
- Wait for approval. Keep paying your bill on time until the lender notifies you that your deferment is approved to avoid late fees and possible damage to your credit.
Prepare for the transition back to regular payments. If approved, you should start creating a plan to handle payments when deferment ends, says Lawrence Sprung, certified financial planner, author of “Financial Planning Made Personal” and founder of Mitlin Financial. While your payments are temporarily suspended, you “should make strides to start saving an amount equal to what the payment will be once it begins,” he says.
Alternatives to Deferring Payments
“Like a band-aid, forbearance and deferment are only temporary solutions,” says Kayikchyan. Some alternatives include:
- Income-driven repayment plans. If you have a federal student loan and you’re enrolled in the standard repayment plan, consider switching to an income-driven repayment, or IDR, plan to lower your monthly payments. These plans are based on your income and family size, so they may be more affordable. But keep in mind that switching to an IDR plan might result in paying more interest over the life of the loan since loan terms are longer compared to the standard plan.
- Review your budget. Kayikchyan recommends reviewing your budget to identify expenses you can trim and reallocating that money toward your loan payments.
- Boost your income. Although increasing your income may be challenging, it’s possible. One way to do this is by picking up a side hustle, like driving for a ridesharing company or beta testing websites and tech products.
- Consolidate your loans. If you can qualify for a lower interest rate, consolidating your loan – taking out another loan to pay off your existing one – could lead to lower monthly payments.
- Ask your lender for alternative options. Sprung says to contact your lender to see what options it offers besides deferment that can ease your payment burden.
Pros and Cons of Loan Deferment
Before you defer loan payments, weigh the advantages against the disadvantages. The table below lists some pros and cons of deferment.
| Pros | Cons |
| Paused or reduced payments | Might extend your repayment term |
| Interest is suspended on some types of loans (e.g., subsidized federal student loans) | Interest may continue growing on the loan while it’s in deferment |
| Might help you avoid defaulting on the loan | May have to provide proof of economic hardship |
Loan Deferment FAQs
When your loans are in deferment, the lender may report this status to the major credit agencies. But having a deferred payment listed on your credit reports doesn’t directly affect your credit score.
A deferred payment is a payment that a lender agrees to allow you to skip without paying a late fee or facing credit consequences. By contrast, a missed payment occurs when you don’t repay your loan as agreed, and it isn’t in deferment. A lender may charge you a late fee for a missed payment and report it to the credit bureaus once it becomes 30 days past due.
The length of time you can defer loan payment varies by lender. Some lenders may only offer one- or two-month deferments, while others may allow you to defer payments for several months, a year or longer.
- APR
- 8.99% to 25.81%
- Minimum FICO Credit Score
- 680
- BBB Rating
- A+
- APR
- 7.74% to 17.99%
- Minimum FICO Credit Score
- Not disclosed
- BBB Rating
- A+
- APR
- 5.2% to 35.99%
- Minimum FICO Credit Score
- 300
- BBB Rating
- A+
