Understanding Deferred Payment Plans

If you’re struggling to make loan or mortgage payments, you may be able to defer your payments. Deferred payment plans allow you to temporarily pause or reduce your monthly payments, which can really help during times of financial hardship. If you’re eligible for deferred payments, it’s important to understand how interest and other costs are accrued during the deferment period and when you’ll be responsible for paying those back. This article summarizes the key points of deferred payment plans and how they may affect the debt you owe.

What Is a Payment Deferral?

A payment deferral is a payment that has been temporarily paused or reduced. Lenders may offer payment deferrals to borrowers who are facing financial hardship. This gives borrowers relief from their monthly payments without facing penalties. Payment deferrals are also used in other types of transactions, such as in business, where buyers/sellers can defer payments for cash flow and accounting purposes. This article focuses on deferred payments for consumer loans, such as car loans, mortgages, personal loans, student loans, and credit card payments. 

How Does a Deferred Payment Plan Work?

If you’re looking to defer your payments you must first contact your lender or loan servicer and see if you’re eligible for a payment deferral plan. If you need a payment deferral due to financial hardship, you’ll typically have to show that the hardship is short term. Because of COVID-19, lenders have set up new deferred payment plans if your employment has been affected by the pandemic. Each lender will have different payment plans available, so it is important to contact your specific lender for more information. 

If you’re speaking with a credit counselor, they may be able to contact your lender on your behalf as well. After contacting your lender, you must request or apply for the deferred payment plan and the lender must agree to it. It’s important that you continue to make payments until you receive a deferred payment plan approval. If you miss payments, they could be reported to the credit bureaus as late or missed payments, which could damage your credit score. As a general rule of thumb, all missed and late payments before the approval will stay on your credit report. 

Once the lender approves the deferred payment plan, they will not repossess or foreclose your secured debt. Repossession is when the bank takes back the property that’s securing a debt. For example, if you took out a loan to buy a car, the bank can take it back if you stop making payments. Similarly, foreclosure is when the bank takes back your home if you don’t pay your mortgage. 

This won’t happen if your deferred payment plan is approved. The lender also won’t report missed payments to credit bureaus. Still, it’s important for you to keep track of this to make sure that your payments are being reported correctly. Your account status may report as deferred, but this won't damage your credit score. 

It's important to understand the terms of the deferral plan. Payment deferral plans are temporary, and you should read the terms to understand what will happen when the deferral period ends. If you want to continue to postpone your loan payments after the deferral period ends, you’ll have to reapply and get the lender's approval. 

Deferment vs. Forbearance

Both deferment and forbearance help borrowers facing financial hardships. Forbearance is an option for some borrowers with mortgage loans and student loan debt. The main difference between forbearance and deferment is how interest is charged. When federal student loan accounts are deferred, interest still accrues but the government pays the interest. But when a student loan account is in forbearance, the borrower is responsible for paying the accrued interest. Deferment and forbearance options differ based on the type of loan and the lender.

Does Interest Accrue During Loan Deferment?

If your loan is deferred, it doesn’t mean that interest won’t accrue during the deferment period. For most loans, interest continues to accrue, even if you’re not required to make payments. The interest accrual during loan deferment depends on both the lender and the payment agreement. 

If you defer a subsidized federal student loan, the federal government will make the interest payments during the deferral period. Most of these loans are automatically deferred while you’re enrolled in an eligible college or career school at least half-time. During this time you don’t have to make loan payments on federal student loans. Federal student loan deferment is not the same as student loan forbearance. If your student loans are in forbearance, you’re responsible for paying the interest that accrues.

For other loans, you may be required to repay the interest that accrues while the payments are deferred. Based on your lender and type of loan, the interest could be applied on the principal alone, or you may be charged interest on the interest that accrues as well. In that case, we say the interest is capitalized. 

For example, say you owe $1,000, and you accrue $10 of interest each month. If your interest only applies to your principal owed, then you only are responsible for the $10 of interest each month during the deferment period. But if your interest is capitalized, then each month your principal amount will increase by the interest you’ve accrued. So, after one month, you will now owe interest on $1010.

On some loans, the deferred payments may be added to the end of the loan’s term, which extends the term or length of the loan. This is sometimes the case for car loan deferments, also called car loan extensions. Other times, the loan may be re-amortized. This means that the total loan amount and the term are recalculated once deferment ends, and you’ll often end up with a higher monthly payment. 

If you get a mortgage forbearance or deferral, you may be required to make a lump-sum payment for all of the debt that was accrued during the deferment period. This could include not just the deferred loan payments and accrued interests, but also insurance and taxes. For other mortgages, the principal balance will remain unchanged throughout the deferment period, and the deferred payments will simply be added to the end of the loan term. It’s important to check the details of your mortgage forbearance plan to determine how interest and debt will accrue during the deferment.

What Alternatives Are There to Payment Deferral?

If you don’t get approved for loan deferral, you may have alternative loss mitigation options available. These options may include: 

• Speaking with your lender and looking at other hardship options, such as temporarily lowering your interest rate or monthly payment amount. 

• Restructuring your loan so that you’re paying a smaller amount per month but over a longer period of time. Note that this will make your payments more affordable in the short term, but you’ll pay more overall on the loan in the long run.

• Refinancing or modifying your mortgage, if you’re dealing with a mortgage loan. This is similar to restructuring a loan and can lower your monthly payments. To take advantage of this, you’ll generally need to have an acceptable credit score or high income. 

• Refinancing your student loans. This option allows you to reduce your monthly payments by extending the terms of your loan. Refinancing may also allow you to get a lower interest rate if one is available. 

Seeking Free Financial Advice

If you’re facing financial hardship and aren’t sure if you’ll be able to keep up with your payment plans you should schedule an appointment for credit counseling. Speaking with a credit counselor is a great first step toward exploring your debt-management options. Accredited, nonprofit credit counseling agencies offer free evaluations for consumers who are interested in learning more about debt management and debt relief options. 

Let's Summarize...

Payment deferral is an agreement between a lender and a borrower (or a seller and a buyer for business transactions) to partially or completely postpone debt payments. Payment deferral can be applied in different ways for different types of consumer loans such as mortgages, student loans, credit cards, and car loans. Lenders may allow payment deferral for borrowers facing financial hardship, but usually only if they can prove that hardship will be temporary. Depending on the loan, lender, and deferral agreement, interest may or may not accrue during payment deferral, and your monthly payment after the deferral period may be higher.