How does payment deferral work for personal loans?

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Deferment is an option that allows you to temporarily pause your loan payments with the lender’s approval during times of financial hardship. Deferring your payments can help keep your accounts in good standing while you get back on your feet, but it’s just a short-term solution.

What’s more, this option isn’t guaranteed for everyone because the outcome will depend on the lender, making it necessary to meet certain criteria. Otherwise, you might need to find alternative options.

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How does personal loan deferment work?

Deferment is typically available for installment loans, such as personal loans, student loans, auto loans and mortgages. Personal loan deferment allows borrowers to postpone payments without impacting their credit score or loan agreement. The deferment period can range from one month to several months, depending on the lender.

Interest and fees typically continue to accrue on the debt during deferment. Consequently, your monthly payment could increase once the deferral period ends. Deferring the loan also means you’ll end up paying interest over a longer period of time since any missed payments are typically added to the end of the loan.

Deferment vs. forbearance: What’s the difference for personal loans?

These terms are used interchangeably by lenders. Both let you pause personal loan payments for a set period, and you can expect the missed payments to be added to the end of the loan term.

Eligibility for personal loan deferment

You may qualify for personal loan deferment if you’re experiencing economic hardship due to: 

• A reduction in hours
• A job loss
• A medical emergency
• A life-changing event 

That said, you could denied for deferment if you cannot provide written proof of your situation or change in financial position to the lender.

How to request personal loan deferment

1. Contact your lender: The first step is reaching out to your lender and explaining your situation. Sharing your circumstances helps a lender understand your need for a deferment.
2. Submit proof of your circumstances: Typically, lenders will require some form of proof regarding your change in circumstances. This could include confirmation that you’ve qualified for unemployment payments or some other form of relevant documentation.
3. Wait for the lender’s decision: If your request is approved, you’ll get a letter stating the terms of your payment deferral, including details on interest accrual and when your next payment will be due. In the meantime, remember to keep making payments to avoid fees and other negative consequences.

Personal loan deferment: Pros and cons

Pros

• Pauses monthly loan payments
• Protects your credit score
• Frees up funds
• Helps prevent default

Cons

• Extends loan term
• Increases borrowing costs
• Approval not guaranteed
• Brief approval period

• Pros in detail
  

  • Pauses monthly loan payments: A personal loan deferment automatically stops monthly payments from being due temporarily.
  • Protects your credit score: Once the personal loan deferment is approved, you credit score isn’t negatively affected due to missed payments.
  • Frees up funds: Even if it’s for a few months, a break in personal loan payments means you can allocate funds elsewhere to get your finances back on track.
  • Helps prevent default: You can avoid accelerated collection activity and severe credit damage by entering into a deferment instead of defaulting on the loan agreement.

• Cons in detail
  

  • Extends loan term: Skipped payments are typically added to the back of the loan, which means you’ll pay over a longer period.
  • Increases borrowing costs: You can also expect higher borrowing costs over the loan term since interest and fees usually accrue during the deferment period.
  • Approval not guaranteed: Lenders don’t automatically grant personal loan deferments to all borrowers facing financial challenges.
  • Brief approval period: Personal loan deferment is not a long-term solution.

5 Things to consider before seeking a personal loan deferment

1. A personal loan deferment isn’t a quick fix.
2. You will pay more in interest over the loan term.
3. You should read the fine print before deciding.
4. Get professional help.
5. Look at other options.

• In detail: 5 Things to consider
  

  1. A personal loan deferment isn’t a quick fix: It is a short break to get your finances in order before payments resume.
  2. You will pay more in interest over the loan term: Run the numbers to determine if the added costs will work for your spending plan.
  3. You should read the fine print before deciding: It details how long your deferment lasts and what to expect in terms of interest and fees.
  4. Get professional help: If your finances seem out of your control, reach out to a credit counselor or other financial professional to learn more about how to effectively manage your finances.
  5. Look at other options: There may be better alternatives available to handle your personal loan payments.

7 Alternatives to a personal loan deferment

While deferment can be a good option for some during financial hardship, there are other ways to make your loan payments more manageable:

1. Loan modification

Some lenders allow you to modify the terms of your loan to lower your monthly payment. This is typically done by extending the length of your repayment term. This can result in more interest paid over the life of the loan, but it can be a good way to reduce your monthly payment if you aren’t sure when you’ll be back on solid financial footing.

2. Refinancing

By refinancing your loans, you’re essentially taking out a new loan with new terms and interest rates to pay off your old one. You can refinance your loans separately or combine multiple loans — and other forms of credit —with a debt consolidation loan.

This can lower your monthly payment by extending your repayment term or securing a lower interest rate. However, for this to work, you’ll need a strong credit score and a stable source of income. Otherwise, it may not be worth your while.

3. Credit counseling

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 tackle debt effectively based on their finances. Most of the time, you can access these services for a nominal fee or even for free, depending on the agency.

4. Consolidate your debt

If you have a solid credit score, a debt consolidation loan could also work. You can use it to pay off all your debt balances using the loan proceeds. This strategy streamlines the repayment process by allowing you to manage all of your loans through a single monthly payment.

5. Hardship programs through lender

Some lenders feature hardship programs that reduce your loan payments or reduce fees for a certain period. It’s worth asking if any of these options are available before requesting a deferment. In some instances, you could be approved for a hardship program without providing any supporting documentation.

6. Local programs

Call 2-1-1 to learn more about programs in your area that may lend financial support to those in need. Depending on your circumstances, you could qualify to have your basic necessities covered, which might help you free up room in your budget to get back on track.

7. Ask friends or family members for assistance

Reach out to a friend or relative you trust and ask for a small loan. If they agree, draft up an agreement that’s realistic and works for both parties. It’s equally important to uphold your end of the bargain to preserve the relationship.

Bottom line

Personal loan deferment lets you 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 during a time of financial need. If you see your situation lasting more than a couple of months, loan modification, refinancing or working with a credit counselor may be a better fit.