How Personal Loan Deferment Works


When faced with financial hardship, such as the widespread job loss many Americans experienced due to the COVID-19 pandemic, financial obligations like personal loan payments can suddenly feel overwhelming and impossible. The worst thing you can do is not make your regularly scheduled payment. The good news is that if you are struggling to make your loan payments, you have options for relief. If you are struggling to make ends meet, a personal loan deferment may provide the break you need to take control of your finances and get back on the right foot. Among the many financial mistakes to avoid during the pandemic is failing to address your financial challenges and simply let them fester.

While deferments are not without consequence, the risk may be worth the reward allowing you to avoid the hit to your credit that a default would bring. Instead of the penalties, fees, interest charges, and the years it can take for your credit to recover from defaulting on a loan, a deferment provides an opportunity to reallocate the money you would otherwise apply toward your loan to other essential expenses to ensure necessities like food and shelter are not compromised during your hardship. Is a deferment the right option for you? Here, we discuss what a deferment is, how it works, and the steps you should take if you need to take advantage of this option for your loan.

What is a deferment?

You cannot just stop making loan payments when faced with a crisis. To stop payments without going into default, you must have a deferment. A deferment is a pre-approved break in your loan payment schedule. When approved for a deferment, the life of your loan will be extended by the duration of the deferment period during which the payment requirement is paused. Usually, a deferment is very short-term lasting only one month, though some lenders will allow deferments between two and six months depending on the circumstances of your hardship. 

How does a deferment work?

If you are approved for a deferment, it is particularly important to understand the terms of your deferment including the start and end dates for the deferment period. Only payments scheduled during the deferment period can be skipped without consequence. Your lender will expect you to make all other payments outside of deferment according to your normal payment schedule. Failure to make timely payments can result in a default which can lead to collections actions or even a lawsuit for failure to pay and breach of contract. 

A deferred payment means that you agree to delay a specific payment to a later date, which also means the life of your loan will be extended by the number of payments that are deferred. While the deferral status will be noted on your credit report, it does not have the same negative impact that a default would which makes it a great option for borrowers facing financial hardship. Missed or late payments should not be reported to credit bureaus, but depending on the terms of your loan, a series of missed or late payments may constitute default which will be reported and tank your credit score.  

It is common for lenders to continue charging interest on the loan through deferment, but some lenders will pause interest as well. During the COVID-19 pandemic, many lenders elected to pause interest in addition to regularly scheduled payments during deferment. If interest continues to accrue during deferment, you will not be expected to make the interest payment immediately. Rather, the interest will be added to your outstanding balance which will tack on extra payments equal to the number of months your loan is in deferment unless you can pay extra toward your loan to reduce the overall life of your loan. 

If you are still struggling to satisfy your financial obligations at the end of your approved deferment period, you may be able to re-apply for another deferment. Some lenders that only grant one-month deferments allow borrowers to re-apply monthly until the borrower’s financial circumstances change; however, many lenders have limits as to the number of times a borrower can apply for a deferment. Talk to your lender about their policy for deferment.

How do I get a deferment? 

If you want to become debt free in 2021, consider how applying for a deferment may help you. Applying for deferment is similar to applying for a loan in the first place. You must contact your lender and request a deferment on your loan. Often, the lender will require information about your need to pause payments, including proof of financial hardship such as job loss, emergency medical expenses, or other change in circumstance that impacts your ability to make regularly scheduled payments. The application process should yield a quick turnaround, however, that could be delayed during high volume times such as during the COVID-19 pandemic when many people were facing financial hardship and deferment applications were plenty. 

Until your request for a deferment is approved, it is important to continue making regularly scheduled payments to avoid defaulting on the loan. You can only skip payments for the months you are approved for deferment. You should not assume that your application will be approved and cancel your payments based on this assumption because this could result in default. Generally, lenders are willing to work with you if you let them know about your hardship and actively seek options for satisfying your financial obligations, rather than just skipping payments. If you think a deferment is the right option for you, talk to your lender to learn more about their qualifications, process, and terms for deferment. Need more assistance? You can access a list of reputable credit counseling agencies on the Federal Trade Commission’s website here.