How personal loan deferment works
The Bankrate promise
At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict , this post may contain references to products from our partners. Here's an explanation for .
Financial hardship can make it difficult to pay back loans. Personal loan deferment is an option that allows borrowers to pause payments for a certain period with approval from the lender. This article discusses how loan deferment works, how it affects your credit score, when to use it and other alternatives to a personal loan during financial hardship.
What is a personal loan deferment?
Personal loan deferment allows borrowers to postpone payments for a set length of time. Deferment can range from one month to several months, depending on your lender. This process requires approval, and your qualification depends on your loan type and whether you meet your lender’s criteria.
Contact your lender and ask for a payment deferment before postponing a payment. Make sure you understand the details of the deferment, including associated fees and whether interest will still accumulate.
When is loan deferment available?
Those who meet the requirements for loan deferment include the following:
- Students enrolling in undergraduate or graduate school.
- Parents who take out Federal Parent PLUS loans.
- People receiving government aid based on their economic status.
- People receiving unemployment benefits.
- Students in graduate fellowships
- Individuals in an approved rehabilitation training program.
- People in active-duty military service.
- Individuals in cancer treatment.
If you don’t meet any of the categories above that doesn’t mean you can’t qualify for deferment. Contact your lender, whether it’s for a personal or student loan, to figure out if you meet the deferment qualifications or if there are other solutions such as loan restructuring or refinancing.
How to get a personal loan deferment
Contact your lender to see if you qualify for deferment. Explain your current circumstances, such as job loss, massive expenses or a widespread emergency, which will be used to determine your eligibility.
If you don’t meet the criteria, ask your lender about financial hardship programs or see if you have the option to restructure or refinance your loan.
Does personal loan deferment affect your credit score?
Loan deferment does not have a direct effect on one’s credit score, however if payments are missed or reported late, it can reduce your overall score. Interest that accumulates during deferment will likely need to be paid as it accrues or added to the loan balance at the end of the loan’s deferment period, resulting in a higher overall cost. Taking too long to request a deferral and being behind on payments may also cause the lender to report it as “late.”
Before requesting deferment, look at other solutions like loan restructuring, exploring aid from charitable organizations or reaching out to other financial establishments. When the deferment is nearly up, contact the lender to request an extension or look into other options.
How interest works during deferment
More often than not, interest will continue to accrue during personal loan deferment. Federal loans, such as subsidized student loans, are another case. But these loans work differently than the personal loans offered by private lenders. If you want to avoid extra interest building up during deferment, consider checking with your lender to see if there are any alternatives.
Alternatives to a personal loan during financial hardship
While deferment is an option during financial hardship, you may find other alternatives more beneficial.
Requesting a hardship program from your bank or credit union is always an option. In order to be considered for a hardship program, you will likely have to provide proof of financial hardship, such as a copy of a termination notice or a recent pay stub.
If you do not qualify for financial hardship, here are some other alternatives you can consider.
- Obtain a credit card. While a credit card may be a last resort, it could be better than defaulting on your personal loan.
- Consider a personal line of credit. This option allows you to borrow funds only when you need them.
- Take out a peer-to-peer loan. You’ll request funds from investors who choose to fund you or not. It will likely come with lower rates than a personal loan.
- Consider a home equity loan or home equity line of credit (HELOC). Both options use your home as collateral and are a reliable source of funds if you need a large amount.
If you have student loans, you could consider temporarily lessening the weight of your debt in other ways.
- Apply for partial forbearance. Some private student loan lenders will offer partial forbearance that allows the borrower to make interest-only payments for a period of time.
- Start an income-driven repayment plan. While mainly offered on federal loans, the monthly payment is based on a percentage of your income, as opposed to the amount you owe. Any remaining debt is forgiven after 20 or 25 years worth of payments. Income-driven repayment is best for people who experience long-term financial difficulty, such as people whose debt exceeds their annual income.
Personal loan deferment is a great option when facing financial hardship, as it allows you to pause what you owe on secured or unsecured loans. Alternatives to loan deferment should also be explored, such as loan restructuring or refinancing. Be sure to understand the details of your deferment, including associated fees and whether interest will still accumulate, before postponing a payment.