Having a diversified credit portfolio is an important part of improving and maintaining your credit score. This means having different kinds of credit and debts, often including personal loans. But what if you can’t make your payments due to an unforeseen financial emergency? If that’s the case, you might consider personal loan deferment.
Personal loan deferment is the process by which payments can be delayed on a personal loan without affecting your credit score. It’s relatively simple on paper, with only a few steps to being approved, but can be complicated and costly if not done properly.
Here’s what you need to know about personal loan deferment.
What Is Personal Loan Deferment?
To start, it’s a good idea to have a basic understanding of what a personal loan is and how it works.
Personal Loans and Crisis
A personal loan is the borrowing of money from a verified lender – a bank, credit union, or online service – for use in a non-business setting. These loans can be used to pay for things like moving expenses, medical bills, wedding or funeral costs, home renovations, among other things.
These are a kind of installment debt, meaning that you are given a lump sum to use, which is then paid back over the course of a set timeline, usually a year or more, depending on the size of the loan you need. You’ll also be paying back interest on the loan as well as any fees associated with it.
Unfortunately, some people find that they’re unable to pay their loans back in the timeframe they originally set, which can lead to a dramatic increase in interest and fees, as well as a dangerous effect on your credit score.
Personal Loan Deferment
To avoid this, some people opt to apply for a personal loan deferment. A deferment is a suspension of payment for a set amount of time, after which time payments resume as normal, and the deferred amount is tacked onto the end of the loan period.
This agreement between the borrower and lender, set up alongside the original contract, means that the money is still getting paid back properly, no terms are violated, and the borrower has time to account for whatever circumstance stopped them from being able to pay.
The Risks of Personal Loan Deferment
As with any other financial exception, personal loan deferment comes with some associated risks that you should be aware of before you consider it as an option.
Applying for a deferment on your personal loan does, unfortunately, mean that you’ll be paying additional interest on the deferred time period at the end of the loan. Be prepared for the additional interest and potential fees to come into play later. Lenders are also not required to allow deferments, so you may not be approved at all.
If that’s the case, you’ll want to examine your options to see if there are other ways you can adjust your debt. Consider looking into consolidation or refinancing to get a better deal or renegotiating the terms of your loan’s payment plans.
How to Defer a Personal Loan
Deferring your personal loan payments will look different in the details according to which lender you’re using, but it will follow the same general process. Here’s what you’ll need to do.
- Contact your lender. This is usually done via phone but can sometimes be done online via the lender website or through email. Explain your situation and request a deferral.
- Fill out the appropriate application. This will ask you a few questions about the situation you find yourself in and the length of the deferral you’re requesting.
- Wait for approval. Your lender may take a week or more to respond to your deferral request.
- Save and repay. During your deferral period, save up what you can to make the next payment scheduled and handle your personal situation. Then, when the deferral period ends, make full payment on your loan and resume your usual schedule.
It’s very important to keep paying, if not in full, then what you can while you wait for your deferral to be approved if your deadline is coming up. While not paying during the deferral period won’t impact your credit score, not paying when the deferral hasn’t been approved will and can make getting future loans and lines of credit incredibly difficult.
If you need an extension of the deferral, contact your lender as early as possible to try and negotiate it. They may need to review your situation again to make the decision.
Conclusion
Though it’s not the only way to stay on top of your finances, in times of personal hardship – job loss, family emergencies, or unexpected global situations – getting a deferment on your personal loan can feel like a blessing. It can ease stress and save your future financial situation as long as you’re handling the process responsibly.
As long as you understand what deferment means and when it is appropriate to use, have a solid agreement with your lender, and are able to get back on top of payments at the end of the deferral period, using personal loan deferment can be a great strategy to save your credit score and bring yourself peace of mind during a crisis.
If nothing else, personal loan deferment is a great first step on your road to recovery.
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