Lenders have several ways to help borrowers who are having difficulty making payments. Deferment is one of those ways. Deferment usually involves a temporary break from making payments, with the lender agreeing to let the borrower skip one or more payments. Lenders usually agree to deferments when a borrower is experiencing difficulty in paying due to temporary conditions.
Deferment involves an agreement between a lender and a borrower, so no late payment or delinquency is involved. Deferment should have no direct impact on your credit. Remember to keep making payments until you are sure that a deferment is agreed and in place and remember that your loan will continue to accrue interest.
What is Deferment?
Deferment is an agreement between a lender and a borrower to temporarily suspend payments on a loan. Because the lender agrees to the suspension, the suspended payments will not be reported as late and will not affect the borrower’s credit.
In most cases, you will have to apply for a deterrent. The lender will want to know why you need a deferment and will expect you to resume payment when the deferment period is over. Some loans may have a provision for deferment in the loan contract that spells out the conditions under which deferment may be granted.
Different types of loans may have different deferment arrangements:
- Student Loans. Federal student loans usually have a number of deferment options, including deferments during periods of continuing education, community service work, unemployment, economic hardship or military service. Private student loans may have less generous terms but may still offer deferment options.
- Auto Loans. Many auto loans have a deferment built into their payment system: look for a “skip a payment” option on the lender’s payment web page or in your loan coupon book. With other lenders, you may have to request deferment in writing. The lender may check your credit or ask for proof that you are in a period of temporary hardship and will be able to resume your payments. Lenders may refer to a car loan deferment as a loan extension or postponement.
- Mortgages. Many mortgages include an automatic deferment of the first payment, giving you a month before you need to start making payments. An agreed break in mortgage payments is usually called forbearance and may be available through an arrangement with your lender.
Remember that deferment is temporary. You may have to apply again if you still cannot make payments after the deferment period, and your lender may be less willing to cooperate a second time.
How Do Deferred Payments Affect Your Credit?
Once your lender has agreed to a deferment, they will report the arrangement to the credit monitoring companies. The payments will be marked as deferred, but this will not affect your credit. Your account will continue to age. Your credit history will be longer, and that could even help your credit.
Always make your payments until the deferment is confirmed. If you miss a payment because you thought a deferment was in place it will be reported as a late payment and it will affect your credit.
Does Interest Accumulate During a Deferment?
In most cases, interest will continue to accrue on your loan balance during a deferment period. That accrued interest may be added to the loan balance after the deferment period. The total cost over the lifetime of your loan will be higher.
You may have to make larger payments or add more payments to the loan term to cover the extra interest cost. Some mortgages may require you to pay the deferred sum plus accrued interest in a single lump-sum payment.
Talk with Your Lender
If you’re under financial stress and you think that you may have problems making payments, talk to your lender immediately. Don’t wait until you’ve already made a late payment. Explain your situation and make it clear that you intend to continue making payments as soon as possible.
Lenders are generally willing to work with stressed borrowers who show good faith, especially when the cause of the stress is a temporary condition or beyond the borrower’s control.
Deferment is just one option a lender may offer. There are several alternatives for dealing with payment problems.
- Hardship Plans. Many lenders offer hardship plans for borrowers who have lost jobs, had medical issues, or have encountered other problems that left them unable to make payments. Deferment may be one option, but others may include interest reduction, term extensions to lower payments, and other adjustments.
- Repayment Plans. Your lender may be willing to let you adopt a different payment plan with lower monthly payments. It may take longer to pay off the loan and you may pay more in interest, but you’ll avoid default and its impact on your credit.
- Forbearance. Deferment and forbearance are similar, but the terms may be used in different ways for different types of loans. Deferment of a student loan generally indicates an arrangement where interest does not accrue on the balance, while forbearance allows interest to accrue while payments are suspended. Mortgage lenders typically refer to any suspension of payments as forbearance. Check with your lender to be sure you understand the terms and conditions.
- Loan modification. Loan modification may be an option with longer-term loans, like mortgages, car loans, and student loans. The term refers to any change in loan terms that makes the loan easier to pay.
- Refinancing. If your credit is good, refinancing may provide some relief. A new loan with either a lower interest rate or a longer loan term could lower your monthly payments.
Most of these tools use the same basic changes in the terms of a loan. A lender will either accept lower or no payment for a short time, lower the loan’s interest rate, or extend the loan’s terms to lower the monthly payment. They may involve different application processes and they may handle interest payments or other features differently.
If you’re having trouble making payments on a mortgage or student loan, many credit counseling agencies offer specific counseling programs that may assist you. If other debts are contributing to your payment difficulties, credit counseling may help. Reducing your expenses or raising your income can also help you manage loan payment difficulties.
Lenders have several ways to assist borrowers who encounter temporary payment problems. Deferment is one of them. If you expect to have problems making payments, contact your lender immediately to discuss your options.
If you decide that deferment is the best option for you, you don’t have to worry about your credit. Deferred payments are not considered late or missed and should have no impact on your credit.