Here’s How Personal Loan Deferment Works
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If you can’t pay your personal loan due to financial hardship, many lenders offer short-term deferment plans that will let you extend your loan term in exchange for a break from your regular monthly payment.
Temporarily pausing your payments isn’t free if your lender charges interest on deferred payments. But if you need short-term relief, deferment may be an option.
What is a deferment on a personal loan?
When you defer a personal loan payment, you’re not absolving yourself of those months’ payments; you’re extending the loan term by however long the deferral period is. If you defer two months’ payments, for example, those payments are tacked onto the end of your loan.
Deferring a payment means you’re delaying it without violating the loan agreement. Some lenders have offered deferred payments as part of a hardship program since before the COVID-19 crisis. Others tailor their hardship offerings to borrowers’ individual needs.
A lender may offer interest-free personal loan deferment, meaning interest wouldn’t accrue on the loan when you pause payments. Other lenders continue to charge interest on the loan during that time. If you defer two months of payments during a 36-month repayment term and the loan keeps accruing interest, you’ll really pay 38 months of interest.
Calculate how much deferment can cost
Make sure you know whether your personal loan will continue to gather interest so you can calculate how much deferring will cost.
How to defer a personal loan payment
Even during a crisis, you must contact your lender and request deferred loan payments. If you start making late payments or skipping them entirely without notifying your lender of a problem, your credit may be impacted and your loan could be considered in default.
A lender may require you to log in, email or call and answer a few questions about your hardship to defer payments. Few lenders divulge specific requirements about who qualifies to defer a loan.
Lenders may not be able to approve hardship applications instantly, especially if there are a lot of borrowers applying for them at once.
How deferred payments affect your credit
Your credit score shouldn’t change much if you defer personal loan payments because lenders aren’t supposed to report them as missed or late to credit bureaus.
Still, you should check your credit reports to be sure it’s being recorded correctly. You can check your free TransUnion credit report with NerdWallet, or visit AnnualCreditReport.com to see your reports with the three major credit bureaus (the other two are Equifax and Experian).
Your credit score will be impacted, however, if the lender hasn’t approved your application for deferment and you stop making payments.
Lenders usually need to make changes to your account to begin the deferment process. If you apply for hardship and your payment comes due before the lender has made a decision on your application, try to make the payment to avoid risking a hit to your credit score.
Other ways to cut costs during a financial hardship
Here are a few ways to get relief if you’re struggling to make personal loan payments.
Consolidate or refinance your loan. If you have good or excellent credit, refinancing or consolidating your debts with a lower-interest loan can be a way to cut costs.
If you have multiple sources of unsecured debt like credit cards, a debt consolidation loan can roll all your debts into one, making payments easier to manage. This option is usually best if the debt consolidation loan’s annual percentage rate is lower.
Look for local alternatives to a personal loan. If you’re trying to avoid adding debt, there may be charities, nonprofits or religious groups in your area that can offer assistance. Search our database for help in your state.
Reach out to other financial institutions. Financial institutions, like banks and mortgage lenders, may still offer resources to those affected by COVID-19. If you need relief, contact your insurer, credit card company, mortgage lender or bank and see if they can offer help.