What to know if you defer your personal loan

Many of us are experiencing financial hardships today. Whether you lost your job during the pandemic or had unexpected medical bills, it can be hard to make ends meet. Many Americans were forced to put their home loans and student loans on hold and some even saw increases in credit card debt. For people who have a personal loan among their debts during the crisis, it’s possible to get some relief by applying for a personal loan deferment.

A deferment is when your lender approves a temporary stop to the payments on a loan without a penalty like causing bad credit until your financial situation changes. While it can help in the short term if you can’t pay your bill, it’s important to understand the long-term impact.

You can explore your best personal loan options by visiting Credible to speak to a personal loan expert and compare options without affecting your credit.

WHAT IS PERSONAL LOAN DEFERMENT?

How does personal loan deferment work?

To defer a personal loan, you need to reach out to your lender and explain your situation. While they’re not obligated to offer deferment, many lenders will work with borrowers to find a solution and restructure a repayment plan, especially in today’s economy.

Lenders usually grant deferments in one-month periods, although it’s possible to request another deferment. Typically, a deferment pushes back the term length by the amount of time approved. For example, if your debt was scheduled to be paid off in May 2022 and you’ve been offered a one-month deferment, the loan will now end in June 2022. In some cases, however, instead of extending the term of the line of credit, the borrower has a balloon payment at the end of the original maturity date with the deferred amount. Check with your lender for clarification.

Multiple lenders limit the number of times borrowers can apply for deferment, while others review cases individually. If you’re granted a one-month deferral and can’t pay the bill at the end of that time, you can contact your lender again to request another deferment.

3 things to know if you defer your personal loan

While a deferment can help until you get back on your feet, it’s important to know the terms so as you don’t end up in more financial trouble or with bad credit down the line.

1. Interest: While you don’t have to make the payment, interest still accrues. Get an idea of the personal loan rate by looking at your most recent loan statement. It should list your loans rate interest charge. That amount will be added to the balance of your loan, and you will have to pay it when you resume your loan repayment.

During the pandemic, some personal loan lenders didn’t continue to accrue interest on deferred loans. It’s important that you speak with your bank or credit union to find out their policies. You can also visit Credible to get in touch with experienced loan officers who can help answer your personal loan questions.

2. Credit score: If you’re approved for a personal loan deferment, your credit score should not be impacted. Normally, lenders would report a missed payment to the credit bureaus as delinquent. In this case, however, they’ll report it as deferred on your credit history, which won’t give you a bad credit score.

3. Payment dates: It’s important to know the start and end date of your deferment period so you know when to resume paying your loan. If you miss your next payment after the end of the deferment, you can incur late fees and your lender will report the missed payment to the credit bureaus.

CAN'T PAY A PERSONAL LOAN? TAKE THESE 6 STEPS

Is personal loan deferment a good idea?

While getting a break from a debt during a time of financial hardship can help you get back on your feet, personal loan deferment has some pros and cons.

First the upsides: A deferment takes one bill off of your plate, allowing you to focus on essential expenses like rent, food and utilities. This can provide you with peace of mind and the ability to work to correct your financial situation without affecting your credit.

That's because a deferment loan option also lets you avoid a missed payment report on your credit history and late fees. If you have an asset as collateral on the loan, you also don’t have to worry about repossession.

But there are downsides. First, deferring a loan payment increases the total amount you pay for the loan. Depending on your personal loan rate and balance, this could add up, especially if you are unable to get back on your feet quickly.

Deferring a loan also increases the term length. If you are working towards eliminating your debt, it will take longer for you to achieve this goal. And deferment adjusts your amortization schedule, impacting the equity of the financed collateral.

3 THINGS TO KNOW WHEN REFINANCING A PERSONAL LOAN

Making your deferral decision

While a loan deferment can be a good option, it’s not your only one. You could consider a debt consolidation option to combine your monthly payments into one lower amount. You’ll need a good credit score to qualify for better terms. You may also be able to refinance your personal loan to improve your interest rate. Credible’s personal loan calculator can help you determine what a new payment might be.

Be sure to take your time making your decision so a short-term fix doesn’t have lasting consequences.

Have a finance-related question, but don't know who to ask? Email The Credible Money Expert at [email protected] and your question might be answered by Credible in our Money Expert column.