What is a Deferred Payment?

Have you ever been in a situation where you need to purchase something important but can’t afford to pay for it upfront? Whether it’s a car, house, or other large-dollar item, you may need to buy something you can’t pay for all at once. Rather than having to go without what you need, you can opt for a deferred payment plan. 

Deferred payment definition 

A deferred payment is when you postpone making payments on a loan or debt until further notice. Depending on the loan and lender, you can defer payments for a month, a year, or even longer. Deferred payments are only an option when a lender and borrower come to a mutual agreement to allow them. 

In addition to being a last resort in times of financial trouble, deferred payments can also be part of a pre-arranged agreement between a lender and borrower. For instance, a car dealer might entice potential buyers by offering two months of no payments when you purchase a vehicle from them. 

Another example is purchasing a new set of kitchen appliances for $8,000. Rather than paying for everything up front, you can set up a deferred payment plan to pay monthly or bi-monthly installments of $1,000 to $2,000 until the appliances are paid for in full. 

It’s important to note that deferring payment on a debt or loan doesn’t mean the loan is canceled. You’ll still need to repay what you owe, but deferment can ease the burden until your financial situation improves. 

Car loan deferment 

A car or auto loan deferment is one of the most common types of deferments. With a car loan deferment, you and the company you purchased your vehicle from mutually agree to let you postpone your payments until a later date. 

Car loan deferment is a good option if you just lost your job or have other unexpected bills and can’t afford your car payments. 

Mortgage loan deferment 

You can also defer payments on your mortgage if you’re behind financially and have missed one or more payments. Mortgage deferment is also known as a partial claim and allows you to take any missed payments and tack them on to the end of your mortgage. That way, your monthly payments don’t increase during the life of the loan — you’ll simply have a longer mortgage. 

Student loan deferment 

Student loans are one of the most commonly deferred loans in the United States. A great example of student loan deferment was during the Covid years when millions of people were forced to leave their jobs temporarily. In response, the United States government ordered that all student loans be deferred without accruing interest until people could return to their jobs. 

However, student loan deferment is an option even when the government doesn’t mandate it. Just remember that deferment isn’t the same as student loan forgiveness. You’ll still have to repay the loan; you’re just postponing payments until a future date. 

Personal loan deferment 

Depending on your lender, you can also defer payments on personal loans, such as Payday Loans, Installment Loans, Title Loans, and Lines of Credit. Personal loan deferment works the same way as deferring other types of loans in that you’re simply delaying payments. 

The biggest difference between deferring personal loans and other types of loans is that personal loans typically accrue interest during deferment. As a result, your debt will increase, which could make it more difficult to repay once deferment ends. 

How to set up a deferred payment with a lender 

Setting up a deferred payment plan will vary depending on your lender and the type of loan you’re deferring. In general, you’ll follow these steps: 

1. Request to set up a deferred payment plan 

A payment deferment isn’t automatic, so you must contact your lender to let them know you’re interested in one. In some cases, they may have you fill out a deferred payment application. You can fill out a deferment application online for student and personal loans, but you’ll likely have to file one in person for mortgages and car loans. 

2. Provide supporting documentation 

Many lenders will only approve deferred payments if you can provide enough evidence of your financial hardship. You may need to send them financial documents such as bank statements, pay stubs, or unemployment compensation as proof. 

3. Wait for approval 

Depending on the lender, they may approve your request right away or shortly after you request the deferment. Most lenders will inform you of their decision by phone or email. 

4. Read the deferment agreement 

Once you’re approved, your lender will send you an agreement contract. Read it carefully so you understand how the payment deferment works and when future payments resume. 

Benefits of a deferred payment plan 

There are several benefits to requesting a payment deferment: 

You’ll have money for essential expenses 

With a loan payment off your plate, you’ll be able to reallocate funds to cover essential expenses, such as your rent or mortgage, utilities, and groceries. A deferred payment can also help you catch up on medical bills, student loans, and other payments. This is important if you’re deferring payments because finances are tight. 

You can avoid late fees 

If you don’t apply for a payment deferment option and miss a loan payment, you’ll probably have to pay a late fee. While late fees vary from lender to lender, they can be costly. 

➢RELATED: How Long Do Late Payments Stay on Your Credit Report?

You may be able to pause interest 

Some lenders offer interest-free deferred payment options, meaning that you won’t have to worry about accruing interest for a period of time. A good example is the government-mandated student loan deferment during Covid. 

If you’re unsure whether your lender offers interest-free deferments, contact them to find out. If your lender charges interest during the deferred payment period, you’ll be responsible for the accumulated interest in addition to the unpaid principal balance. 

What to do if you don’t qualify for a deferred payment 

If you've requested a deferment, written a letter of financial hardship, and provided the necessary documentation, but you still don't meet the lender's eligibility requirements, there are other options worth considering. 

Request a modified payment plan 

A modified payment plan restructures your loan and may make your monthly payments more affordable. You can do this by lowering interest rates or extending the life of the loan. Modifying your loan may allow you to change the due date, which could help you avoid a missed payment. 

Most lenders require you to have a good payment history before they restructure an existing loan, so if you've missed payments in the past, you may not qualify. 

Consolidate your debt 

Debt consolidation might be a good option if you're having trouble repaying multiple loans simultaneously. Debt consolidation involves taking out a new loan to pay off your existing ones. You’ll have one convenient payment and pay less on overall loan interest. 

As with loan refinancing, Advance America also offers several loans that are ideal for debt consolidation. You can use the proceeds to pay off your existing loans and set up a favorable payment plan to pay off your new one. 

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Deferred payment FAQs 

How long can I defer loan payments? 

How long you can defer loan payments depends on the loan type and your lender. With student loans, you can often defer payments for up to three years. With mortgages, car loans, and personal loans, however, you can typically only defer payments for a month or two. 

Will deferring a payment hurt my credit? 

Deferring payments on any type of loan doesn’t hurt your credit score. In fact, deferring payments can actually save your credit score because it helps you avoid missed and late payments that get reported to the credit bureaus. Keep in mind, however, that interest may continue to accrue. 

How many times can you do a deferred payment? 

The type of loan and lender determine how often you can make a deferred payment. You can typically defer mortgage payments up to 12 times, whereas car and personal loan deferrals are more limited. 

What if I don’t qualify for a deferred payment option? 

If you don’t qualify for deferred payment, you’ll need to continue making monthly payments on your loan or debt. To make payments easier, you can opt to consolidate it with other debts or request a modified repayment plan from your lender. 

Ask about deferred payment options 

If you’re struggling with loan payments due to recent financial changes, requesting a deferred payment may be a good option to explore. Deferring payments keeps you in good standing with your lender, prevents late and missed payment information from appearing on your credit report, and buys you some time to get your finances back on track. Even if you don’t qualify for loan payment deferment, your lender may be able to offer similar solutions to help you.