Personal Loan Deferment Explained

When you decide to take out a personal loan, you are typically expected to make monthly payments until the loan is fully paid off. However, there may be times when you can’t make those payments, and you may be wondering what to do.  

The first question many people have is can you defer a personal loan payment and the short answer is yes!  

Deferring your personal loan can have some benefits, but there are also some potential drawbacks that you should be aware of.   

When you defer your personal loan, you are essentially postponing your payments. This can be a good option if you are experiencing financial hardship or if you simply need more time to pay off your loan.   

Keep in mind that a personal loan with deferred payments will still accrue interest during this deferment period. This means that your total loan balance will be higher when you start making payments again.  

Additionally, by going through this process you’re just extending the loan term by however long this period is. So, in case you defer two months’ payments, they will be tacked onto the end of your loan.  

If you are considering deferring your payment on a personal loan, be sure to contact your lender to discuss your options. You may be able to extend your repayment term or lower your monthly installment, which can make it easier to afford your loan without needing to stop it altogether.  

What is a Personal Loan Deferment?

When you decide on taking out a personal loan no one likes to think about what will happen if they cannot pay it at some point. A lot can change over the years, but take some time to think if you will be able to afford to repay it down the road.   

In case you took out a personal loan but now have some hardships, you may be able to defer your payments.   

What this means is that you can postpone making monthly installments on your loan for a period of time. This is generally available to those who have difficulties making payments, or if they are currently going through a financial crisis but they still need to prove these claims.  

However, personal loans with deferred payments aren’t a topic that should be taken lightly. First, you shouldn’t overlook that interest will continue to accrue on your loan during the deferment period. This means that the total amount of your loan will increase, and you will ultimately have to pay more in interest.   

Secondly, deferring your loan payments may negatively impact your credit score. This is why it is important for you to contact your lender and discuss other options that may be better suited. 

How Does a Personal Loan Deferment Work?

Now that we covered what this process is, you are probably wondering how to defer a personal loan.  

If you’re struggling, you may be considering it as a way to reduce or postpone your payments.   

So, in most cases, you’ll need to contact your lender and put in a formal personal loan deferment request letter. Once this is approved, your interest will continue to accrue, but you won’t be required to make any payments.   

After the deferment period ends, you’ll typically have a grace period of 6 months before you’re required to start making payments again.  

Considering all the downsides of this process, you may be wondering, why someone might contemplate doing this. Well, for example, someone may be experiencing financial hardship due to job loss or unexpected medical expenses. Or, they may be going back to school and need a break from making loan payments.  

Whatever the reason, it’s important to understand how personal loan deferments work before requesting one. By taking time to educate yourself on this topic, you or anyone else can be sure that it’s the right decision for a current situation. 

In addition to all this, your lender may deny your deferment request and you need to be aware of other options out there.  

Is a Personal Loan Deferment Bad for Your Credit?

We already briefly mentioned this, so in short, the result will depend on your lenders’ decision.   

Your credit score will be negatively impacted if the lender hasn’t approved your application for deferment and you stop making payments. So, once they report the loan as delinquent to the credit bureaus your score will drop.  

This negative impact on your score will make it difficult to qualify for new lines of credit in the future.   

However, lenders aren’t supposed to report these payments as missed or late to credit bureaus so your credit score shouldn’t change much if you defer personal loan payments.  

So, it all depends on the lender and how they view your request.  

This is exactly why it is essential that if you are experiencing any trouble contact your lender as soon as possible. If they know what the problem is, what caused it, and how and when you are going to solve it, they may look more favorably at your situation.  

CommBank and some other banks will let you defer a personal loan on a relatively good term. 

Will Interest Be Charged During a Deferment?

As you already know, the deferred personal loan still accrues interest over time.  

That means that when you start making payments again, your monthly payment will be higher than it was previously because you’ll also have to pay off the interest.  

If you’re considering going through this process, make sure to think about all of the details before making a decision. You don’t want to end up in a worse financial situation than you were in before.  

There are many calculators that can be found online that can help you know how much you will be paying in additional interest. All you need to provide is the outstanding loan balance, your APR, and the number of months you are planning to defer the payments.

Alternatives to Personal Loan Deferment

We said many times throughout this article, that this process shouldn’t be your first choice but more of the last resort if the other alternatives do not fit your needs.  

Understand that deferment is not a long-term solution. If you’re facing financial problems, you’ll need to find a way to address the underlying issue. Otherwise, you’ll likely find yourself in the same situation a few months down the road.  

Most lenders will require you to undergo a credit check before they approve your request for deferment. If your credit score has declined since you took out the loan, this could result in an increase in your interest rate.  

So, what are some alternatives to personal loan deferment? Here are a few options to consider: 

• Personal loan modification. If you’re having trouble making your payments, reach out to your lender and see if they’d be willing to modify your loan terms. This could involve lengthening the repayment period or lowering your monthly payment amount. It is a great alternative if you do not have to stop making payments altogether.  

• Consolidating your loan. If you have a good credit score and are sure you will be unable to pay your personal loan in monthly installments, look into consolidation options. This can secure you much lower payment and better terms so you may be able to continue with your payments on these more favorable terms. It can be a great option to consider if your lender also declined deferment.  

• Loan forbearance. People often think that forbearance is only reserved for student loans, but that is simply not true. Lenders can have their own criteria you must fulfill to be able to get lowered payments for a few months. In general, it is best to call your lender or schedule a meeting and see what your options are, and whether you can qualify for forbearance.  

Final Thoughts

When you take out a personal loan, you are responsible for making regular payments on it until the loan is paid off. If you find yourself in a financial bind and are unable to keep making these payments on time or at all, you may be able to defer the loan. Although this is just a temporary stop, it can help immensely.   

There are a few things to keep in mind here, and we talked in-depth about each of them in this article. To summarize all that has been said, your interest will continue to accrue on the unpaid balance and some lenders may require you to make a lump sum payment when you resume your loan.  

Before deciding to defer your personal loan, be sure to consider all of your options. This should only be seen as a last resort if nothing else works out. Talk to a financial advisor in case you need any help deciding what is best for your financial situation.