How does payment deferral work for personal loans?

Financial hardship can make it difficult to pay back loans. Deferment is an option that allows you to temporarily pause your loan payments with the lender’s approval.

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. Interest will still continue to accrue on your debt while your loan payments are deferred. What’s more, how personal loan deferment works will depend on the lender — and this option isn’t guaranteed for everyone. You must meet certain criteria to obtain approval.

What is loan deferment?

Personal loan deferment is a form of forbearance that 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.

Deferment is typically available for installment loans, including personal loans, student loans, auto loans and mortgages. However, it’s important to remember that even while loan payments are deferred, interest will keep accruing on the debt.

Taking this step can be beneficial if you’re experiencing unexpected financial hardship such as loss of a job. Pausing payments can allow you to get back on your feet financially without impacting your credit profile. During deferment, a lender will not report skipped payments to the

Does personal loan deferment affect your credit score?

Deferment is a tool to keep your loan account in good standing while experiencing hardship. Because of this, your credit won’t be negatively impacted just because your loan is in deferment. If you stop making payments before your request is approved, your credit score may take a hit if the lender reports a late or missed payment. Make sure to check your deferment status and when it should become effective to avoid any unpleasant surprises.

How interest works during deferment

With the exception of subsidized federal student loans, interest and fees typically continue to accrue during deferment. This may cause your monthly payment to increase once the deferral period ends.

Essentially, you’re extending the loan term or repayment timeline when you defer payments. This means you’ll end up paying interest over a longer period of time — so if your original loan term was 24 months and you defer loan payments for three months, you will end up paying interest for a total of 27 months as a result.

How to request personal loan deferment

If personal loan deferment is the right move for you, contact your lender with proof of your financial struggles to get the process started.

• Contact your lender: The first step is reaching out to your lender and explaining your situation. Deferment can be a useful tool if you’re experiencing financial hardship due to a reduction of hours or job loss or economic hardship due to medical reasons or a life-changing event. Sharing your circumstances helps a lender understand your need for a deferment.
• 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 documentation surrounding your specific situation.
• 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. But remember, while waiting for a lender’s decision, you’re still responsible for making payments. Otherwise, you could face late payment fees and other consequences.

Alternatives to a personal loan deferment during financial hardship

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

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.

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. 

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.

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.