How Does Loan Deferment Work?

Financial difficulties can make loan repayment difficult. Personal loan deferment is an option that allows borrowers to pause payments for a set period of time with lender pre-approval. This article explains how loan deferment works, how it affects your credit score, when to use it, and other alternatives to a personal loan during times of financial difficulty.
What exactly is a loan deferment?
Borrowers can defer payments on personal loans for a set period of time. Depending on your lender, deferment can last from one month to several months. This process necessitates pre-approval, and your qualification is determined by your loan type and whether you meet your lender’s requirements.
Before deferring a payment, contact your lender and request a payment deferment. Make certain you understand the specifics of the deferment, including any associated fees and whether or not interest will continue to accrue.
When can I get a personal loan deferment?
Those who qualify for loan deferment include the following:
- Students pursuing undergraduate or graduate studies.
- Parents who obtain Federal Parent PLUS loans.
- People who receive government assistance based on their economic situation.
- People who are receiving unemployment benefits.
- Graduate students on fellowships
- Individuals enrolled in a rehabilitation training program that has been approved.
- People who are on active duty in the military.
- People undergoing cancer treatment.
- If you do not fit into any of the above categories, you may still be eligible for deferment. Contact your lender to see if you qualify for a deferment or if there are other options, such as loan restructuring or refinancing.
How to Apply for a Personal Loan Deferment
Check with your lender to see if you are eligible for a deferment. Explain your current situation, such as job loss, large expenses, or a widespread emergency, as this will be used to determine your eligibility.
If you don’t meet the requirements, talk to your lender about financial hardship programs or see if you can restructure or refinance your loan.
Is personal loan deferment bad for your credit?
Loan deferment has no direct effect on one’s credit score; however, missed or late payments can lower your overall score. Interest accumulated during deferment will almost certainly have to be paid as it accrues or added to the loan balance at the end of the deferment period, resulting in a higher overall cost. If you wait too long to request a deferral and fall behind on payments, the lender may report it as “late.”
Furthermore, for private or federal unsubsidized loans, interest will continue to accrue during the deferment, which can lower the credit score.
Before requesting a deferment, consider other options such as loan restructuring, seeking assistance from charitable organizations, or contacting other financial institutions. When the deferment period is about to expire, contact the lender to request an extension or consider other options.
What happens to interest during deferment?
During the period of deferment, interest continues to accumulate. However, interest that does accrue on subsidized loans is paid by the federal government. While payments are paused on unsubsidized loans, interest usually accrues, but the payment pause and interest waiver that began at the start of the pandemic in March 2020 waives interest on both types of federal loans. If you have an unsubsidized loan, check with your lender to see if there are any alternatives to loan deferment.
Alternatives to a personal loan in times of financial difficulty
While deferment is an option in times of financial hardship, you may find that other options are more beneficial.
- It is always possible to request a hardship program from your bank or credit union. You will most likely be required to provide proof of financial hardship, such as a copy of a termination notice or a recent pay stub, in order to be considered for a hardship program.
- If you are not eligible for financial hardship, here are some other options to consider.
- Get a credit card. While a credit card may be a last resort, it may be preferable to defaulting on a personal loan.
- Consider obtaining a personal line of credit. This option enables you to borrow funds only when they are required.
- Get a peer-to-peer loan. You will request funds from investors, who will decide whether or not to fund you. It will most likely have lower interest rates than a personal loan.
- Consider a home equity loan or line of credit (HELOC). Both options use your home as collateral and are a dependable source of funds if you require a large sum.
- Request a partial forbearance. Some private student loan lenders will provide partial forbearance, allowing the borrower to make interest-only payments for a set period of time.
- Begin an income-based repayment plan. While mostly available on federal loans, the monthly payment is based on a percentage of your income rather than the amount owed. After 20 or 25 years of payments, any remaining debt is forgiven. People who are in long-term financial difficulty, such as those whose debt exceeds their annual income, should use income-driven repayment.
In conclusion
When facing financial difficulties, personal loan deferment is a great option because it allows you to pause what you owe on secured or unsecured loans. Loan restructuring or refinancing should be considered as alternatives to loan deferment. Before deferring a payment, make sure you understand the terms of your deferment, including any associated fees and whether interest will still accrue.