What Is Loan Deferment? – In the unfixed world of personal finance, steering through the waters of loan repayment can be quite challenging, especially when it comes to unforeseen life events and financial uncertainty. This is when loan deferment comes in. But what is loan deferment? First, you need to know that it is a lifesaver. Besides, loan deferment might be a good option if you are trying to pay up your debts.
With this tool, you can get out of unsure periods and even allow you to pause your payments for a while. Additionally, many loan lenders offer the loan deferment option so read on to discover more about how this tool works.
What Is Loan Deferment?
Loan deferment is a short-term pause approved by the lender to pay a loan based on certain terms and conditions. During this period, you are alleviated of the responsibility to pay back regularly, giving short-term financial relief. However, the interest might or might not continue to accrue during this period depending on the deferment terms and type of loan. Meanwhile, once this period ends, you will need to resume making your loan payments based on the original terms of the agreement.
How Does It Work?
Loan deferment enables existing borrowers to pause the repayment of their loan, usually approved and offered by the lender. However, this is under certain terms and circumstances like school enrolment or financial hardship. But the borrower will need to request for deferment and the lender will confirm eligibility. If you are approved, you will be granted a deferment period during which your repayments are halted. Nonetheless, keep in mind that the interest may or may not accrue. After the deferment period is over, you will need to continue your regular payment.
Which Loan Type Can I Defer?
Installment loans in general are eligible for loan deferment because you can pay them back in fixed monthly payments. On the other hand, every lender has their unique criteria for whether a loan can be deferred or not. Here are the common types of loans that you can defer:
- Auto loans.
- Personal loans.
- Federal student loans.
- Small business loans.
- Private student loans.
- Mortgage loans.
- Credit cards.
Pros and Cons of Deferring
Here are the benefits and drawbacks of deferring a loan:
Pros
- Temporary financial relief.
- No credit score impact.
- Defaulting averted.
- Focus on other responsibilities.
- Legal protection.
- Flexible repayment options.
- Education or career advancement.
- Continued eligibility for assistance programs.
Cons
- Prolonged repayment period.
- Risk of default after deferment.
- Accrued interest.
- Formal application process.
- Higher overall loan balance.
- Possible negative credit reporting.
- Limited eligibility.
- Temporary relief.
Who is Eligible?
Who is eligible for loan deferment? This factor is determined by the policies of the lender and the type of loan. Meanwhile, here are the common criteria to meet to qualify:
- If you are a graduate student.
- Experiencing economic hardship.
- If you are in are unemployed.
- If you are currently in school.
- Are in a rehabilitation training program.
- If you are getting cancer treatment.
- If your child is still in school and you have a parent PLUS loan.
- You are in an active-duty military service.
You can qualify for loan deferment if you fall in any of these categories.
How Does Loan Deferment Affect Your Credit?
The way the lender reports your loan deferment to the credit bureaus determines how this tool affects your credit score. If the loan deferment application was approved by the lender and reported correctly, it should not affect your credit score negatively. On the other hand, if the lender reports this request as delinquency or missed payment, it can potentially reduce your credit score. This is why it is crucial to speak to your lender to understand the loan deferment process before anything.
How To Defer a Loan
If you would like to defer any type of loan, there are several steps involved. It is important that you follow the right guide, especially if you have never done it before. With this in mind, follow this step-by-step guide to proceed
- Check the loan terms.
- Get familiar with the agreement and understand it.
- Reach out to the lender.
- Ask for the loan deferment form.
- Fill out the form correctly.
- Providing supporting documents.
- Submit the request.
- Wait for the lender to review your request.
- Be patient.
- Review the deferment terms if you are approved.
- Check out the conditions, restrictions, deferment period, and if the interest will be accrued.
- Agree with the conditions.
- Once the deferment period is over, resume making payments.
- Explore alternative repayment options.
- Keep track of loan status.
Make sure you also make the payment on time and communicate with your lender if you need to understand something.
Loan Deferment Alternatives
Here are alternatives to loan deferment that you can consider if you have run out of options:
- Forbearance.
- Extra payments.
- Seeking assistance programs.
- Extended repayment plans.
- Income-driven repayment plans.
- Loan modification.
- Refinancing or consolidation.
- Hardship programs.
- Selling assets.
- Debt management plans.
- Liquidating savings.
It is important that you consider and research the possible advantages and drawbacks of these options before proceeding. You can also ask a financial advisor for help.
