Deferring Payments & Your Credit

How Does Deferring a Payment Work?

When you request a loan deferment and your lender agrees to the arrangement, you’re allowed to temporarily stop making payments on the loan. You don’t need to worry about late payment fees or your loan servicer reporting missed payments to the credit bureaus.

Generally, you’ll need to apply if you want to put your loan into deferment. The process can vary depending on the type of loan you have and which creditor or loan servicer you send your payments to each month.

• If you have a federal student loan, you can submit your request to your loan servicer. You can review the eligibility requirements for loan deferment or forbearance (a similar option that lets you temporarily stop making payments) on the Department of Education’s website. Your loans may automatically be put into deferment if you enroll in an eligible school with at least a half-time course load.
• With an auto loan, the lender may refer to the arrangement as a loan extension or postponement. Each lender will have different criteria you must meet before they grant an extension. For example, you may need to show that you’re requesting the extension due to a temporary setback, such as a medical emergency.
• If you’re having trouble with mortgage payments, you can contact your mortgage servicer to discuss your options. One option may be able to place your loan into forbearance and temporarily stop making payments or make smaller payments. You can get free assistance from a Department of Housing and Urban Development (HUD) counselor who can help explain your options.

Whether it’s called deferment, loan extension, postponement or forbearance, continue making your payments until you’re certain that your lender or loan servicer has approved your application and is allowing you to stop making payments.

Also, remember that these arrangements are temporary and you may need to reapply if you want to keep postponing payments.

Can Deferred Payments Affect My Credit?

When a lender approves your deferment request, it should report that your payments are currently deferred to the credit bureaus. While this appears on your credit report, the deferment mark won’t directly help or hurt your credit scores.

The accounts can continue to impact your credit scores, though. For example, your account will continue to age, which lengthens your credit history and could help your scores.

Also, keep in mind that if you apply for deferment and stop making payments, but your lender denies the deferment request or a payment is due before it’s approved, the late payment could still get reported to the credit bureaus and hurt your scores.

If you missed payments before putting your loan into deferment, those late payments won’t be removed from your credit history. However, if your account was past due when you entered deferment, their impact may temporarily be ignored while your loan is in deferment.

Will I Still Be Charged Interest During Deferment?

There are certain situations when you don’t need to pay the interest that accrues during deferment. For example, if you have subsidized federal student loans, the government may make the interest payments during deferment (but not for student loan forbearance).

Subsidized student loans aside, you may be responsible for repaying the interest that accrues while you’ve postponed your payments. You may get a slight break if your interest rate only applies to your loan’s principal balance during deferment—meaning you won’t be charged interest on the interest that accrues.

However, even then, once you start making payments, the accrued interest could be capitalized—added to your principal balance—and your interest rate now applies to the larger principal balance. As a result, more interest may accrue each month after your deferment ends.

Depending on the arrangement, you may add additional loan payments to the end of your loan’s term or your monthly payment amount may increase. In either case, you wind up paying more overall than if you hadn’t deferred your payments.

For mortgages, you may have to make a large lump-sum payment for the entire amount past due that accrued during the forbearance. This can include the missed loan payments, interest and insurance.

Loan Deferment Alternatives

In the cases where you may have trouble affording your loan payments but don’t want to put your loans into deferment, your deferment request is denied or you’ve reached the maximum amount of time your loans can be in deferment, you’ll need to consider other alternatives.

Your options will depend on the type of loan you have, your lender or loan servicer, and the reasons you’re having trouble affording payments. They may include:

• Your lender could offer alternative hardship options, such as temporarily lowering your interest rate or monthly payment amount.
• You may be able to switch to a different repayment plan with a lower monthly payment.
• You might be able to permanently modify your loan agreement and lower your monthly payments.
• You could refinance your loan and your new loan could have a longer term or lower interest rate, which can lead to a lower monthly payment. However, this may require good credit and a higher income.

Having Trouble? Act Quickly

If you’re currently faced with a bill that you can’t afford, or foresee being unable to afford bills due to losing a job, a medical emergency or another crisis, reach out to your lender or loan servicer right away. They may be able to explain your options and figure out an arrangement (deferment or otherwise) that can keep your account in good standing and help you avoid late fees and hurting your credit.

Blog Author: Louis DeNicola