What is personal loan deferment?

Personal loans can be a good option if you need quick cash or if you need to cover a sudden or unexpected expense.

If you find yourself in this situation, you may want to explore deferment — an option often available for borrowers in financial hardship. Are you having difficulty staying current on your personal loan? Here’s what you need to know about deferment and other alternatives you may have.

What is a personal loan deferment?

Deferment lets you pause your loan payments temporarily, typically due to financial hardship or a temporary loss of income.

Here’s how Rich Tambor, chief risk officer at OneMain Financial, explained it: “The lender is allowing the customer to put off partial repayment of their loan to some time in the future. The customer agrees that the amounts due during the period of the deferment will be repaid — usually at the end of the term of the loan.”

Deferment periods vary, but they usually last for at least a few months. You won’t have to make payments during that time frame, and the missed payments will be repaid at the end of the loan via additional monthly payments. It’s essentially a way of pausing payments and extending your loan term simultaneously.

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Will I always be able to defer my loan payments?

According to Tambor, some lenders were offering three-month deferments earlier this year to help borrowers who found themselves in hard times. Some even let those borrowers extend the deferment for another three months if the situation did not approve.

If your lender does offer a deferment option, you will likely need to prove your financial hardship in some way, using paychecks, bank account statements, a pink slip, or other documentation. Keep in mind that your balance will typically keep accruing interest while in deferment, so it doesn’t come for free. Make sure you understand your lender’s exact rules for deferment and what it may cost you in the long run.

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Does personal loan deferment hurt my credit score?

According to Leslie Tayne, a debt relief attorney with the Tayne Law Group, lenders do add a note to accounts in deferment when reporting their status to credit bureaus.

“While the note added to credit reports doesn’t directly affect credit scores, the fact that it’s there may impact your ability to borrow further and have other implications,” Tayne said.

Put simply, it means you might have a hard time taking out other financial products, and it could show up on your report if it’s pulled by a potential landlord or employer.

What will hurt your credit score, though, is if you wait too long to join your deferment plan. Make sure you contact your lender and ask about deferment before missing a payment. Late and overdue payments can hurt your score considerably and impact your future financial options.

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What are my other options?

Deferments are ideal if you’re facing short-term difficulties — like a loss of working hours or a furlough.

“The deferment allows the consumer a little breathing room when they believe that they’ll be back on track and able to resume regular payments in a month or two,” Tambor said.

If your lender doesn’t offer deferment or you think your financial situation may be longer, you have other options, too. The first would be a loan modification.

“Usually, these include a few months of reduced payments along with an interest rate reduction to help a customer through a temporary hardship that is expected to exceed a month or two,” Tambor said.

Loan modifications can also allow you to extend your loan term, which would lower your monthly payment and make it more affordable. Again, you may need to provide some documented proof.

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The bottom line

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