Ideally we would love to pay off all our debt on time but you know…life happens, right? Sometimes there are unforeseen circumstances that get in the way of regular payments and when that happens, simply delaying the payment and hoping things will be okay is not a great option. So what can you do instead? That’s where the arrangement of deferred payments comes into play.
Deferred payments can be a lifesaver when you're short on cash or faced with an unexpected expense. But just like that extra slice of pizza, they can come with a side of regret if you're not careful. While the idea of delaying payments may seem like a walk in the park, it's important to understand the potential consequences before diving in. So, let's take a closer look at how deferred payments work and what you need to know before hitting the "defer" button.
What is deferred payment?
Deferred payment option is an extension granted to the borrower by the lender or the creditor. This postponement can give you some breathing room if you're going through a tough time financially, like trying to get settled into a new job or struggling with an unforeseen emergency.
Unfortunately though, there’s a catch: While deferred payments can give you temporary relief, they can also result in higher interest costs and longer repayment periods. To simply put, if you defer a payment on your loan, you may end up paying more in interest over the life of the loan.
How do deferred payments affect credit scores?
Deferred payments are reported to the credit bureau but they don’t necessarily bring your credit score down. If you make your payments on time after the deferral period ends, then it won't negatively impact your credit score. However, if you miss a payment altogether, and if you keep missing payments consistently. it can have a negative impact on your credit score. And we know what a lower credit score means: Lower credit score makes it harder for you to get approved for a loan or a credit card in the future, which could limit your options.
So what’s the alternative? The first step is to communicate with your lender if you're having trouble making payments. They may be able to offer you other options, like lowering your monthly payments or adjusting your payment schedule.
Is deferred payment good or bad?
Just like any other financial arrangement, deferred payments too come with their own set of pros and cons. Whether it’s a good choice for you or not is subjective, and it depends on your current financial situation. Let’s look at both sides of deferred payments so that you can make an informed decision.
The pros are pretty obvious—you get some relief from your immediate and upcoming payments and you can do so without avoiding late fees or raking up penalties. The con, as we mentioned before, is that it can cost you more money in the long run.
Overall, it's important to remember that deferring payments should not be used as a long-term solution to debt problems—it’s a temporary fix, and should be used like one.
Lastly, if you do decide to defer a payment, make sure you understand the terms and conditions. Find out how it will impact your interest charges and repayment period, and make sure you resume regular payments as soon as you can.
How Deferred Payment Options Work
In order to understand how deferred payments work, let’s first start with a refresher on how loan or debt repayments work.
When you make a repayment on your loan, a portion of the payment goes toward the balance of the loan, while the remainder goes toward interest. Interest is continually being calculated on your remaining loan balance, and interest is still calculated even when you defer a payment. Since you're delaying a payment, your balance does not go down, and the interest is added to your loan, making your total balance grow. Deferring a payment could extend your loan period, cause you to owe more interest, and repay more money in total at the end of your loan.
When choosing to defer a payment, it's essential to discuss your situation with your lender or creditor to understand their deferred payment program's specific rules and how it could impact your credit rating and scores.
Deferred payment examples
Deferred payments are special agreements that can be found in various loan types or financing promotions. For instance, student loans may allow you to start repaying the loan six months after graduation, while a store may offer a financing promotion where you don't have to make payments for 90 days. While this can provide you with the necessary time to find a job or break up your payments on an essential item, it could impact your interest rates and extend your loan period.
Let’s take the example of John Smith when trying to understand all the different scenarios where deferred payments might show up.
Many student loan providers offer deferred payment options to students who are unable to make regular payments towards their education loans. For example, John Smith recently graduated from university and is having trouble finding a job. His student loan provider offers him the option to defer his payments until he finds employment.
Homeowners who are struggling to make their mortgage payments may be able to defer payments for a period of time. In the case of John Smith, he lost his job and is struggling to make his mortgage payments. That’s why his lender offered him the option to defer his payments for a few months while he finds new employment.
John Smith's car broke down and he can't afford to make his car loan payments as he has to spend a lot of money on car repairs. His car loan provider allows him to defer his payments for a few months while he saves up for the repairs and brings his finances back on track. Similar to John Smith’s car loan provider, some car loan providers offer deferred payment options, allowing borrowers to delay their payments for a certain period of time.
John Smith has been hit with medical bills that he didn’t see coming and is struggling to make his credit card payments on time. His credit card company offers him the option to defer his payments for a few months while he gets back on his feet. Some credit card companies, just like John’s, may offer deferred payment options to customers who are experiencing financial hardship.
Some lenders may allow borrowers to defer payments on personal loans for a period of time. In the case of John Smith, let’s say he had an unexpected expense come up and is unable to make his personal loan payments for a couple of months. His lender offers him the option to defer his payments for a few months while he catches up on his other bills.
All in all, deferred payments can provide short-term cash flow flexibility, but it's crucial to understand their implications before you sign up for them. They aren't a gift, and while they may include a waiver of late fees, you would be required to repay interest that accrues during the approved deferral period. Don't just skip a payment and expect things to be okay. You will need to work out a special payment arrangement with your lender before you start delaying payments that are due, or you could jeopardize your credit standing.
Meghana is a content strategist with experience writing for companies in the technology sector. Originally from India, Meghana has been living in Canada since 2019, where she continues to explore her passion for content marketing.