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If you find yourself struggling to repay your personal loan, don’t just let your debts go to collections. Instead, reach out to your lender to see if they offer short-term hardship plans, also known as deferment plans. Taking a short-term break from your loan obligation may give you the breathing room needed to navigate a tight financial situation.
That said, personal loan deferment plans have limits, so you should know how they work before applying.
What Is Personal Loan Deferment?
A personal loan deferment is a preapproved pause in your loan repayment schedule. Generally, deferments are reserved for people experiencing hardship, such as a natural disaster, sudden job loss, or expensive medical care.
Lenders aren’t required to offer personal loan deferments in most cases. However, if you’re proactive in your approach, many prefer to work with borrowers instead of going the expensive collections route.
>> More: How to Manage Your Personal Loan
How Does a Personal Loan Deferment Work?
When you defer a loan payment, your personal loan lenderextends your loan term in exchange for giving you a short break. For example, if you get a one-month deferment, you’d skip your next payment and add one month to the end of your loan term. For some borrowers, deferring 1-2 payments is all it takes to get caught up and resume their normal repayment schedule.
Lenders can set their own terms for personal loan deferments, including:
- Start and end dates
- Whether they charge interest during the deferment period
- Limiting how many deferments you can take for a single loan
- Whether you have to reach out by phone or apply online
Before you agree to a personal loan deferment, be sure you understand your lender’s procedures and terms.
Does Deferred Personal Loan Payments Affect Your Credit Score?
Going the deferment route means delaying your next payment without violating your loan agreement. As such, you won’t incur late fees or a negative mark on your credit report. That said, you may want to watch your credit report to ensure the lender reports your situation correctly.
Additionally, if you apply for a deferment and then miss a payment before it’s approved, that counts as a missed payment, which can harm your credit score. The same goes for a late or missing payment when your deferment period expires.
How to Defer a Personal Loan Payment
To defer a personal loan payment, you’ll have to start by contacting your lender. They may require you to call, email, or navigate their online portal and apply with details about your hardship. This process can take some time, so don’t wait until the last minute to reach out!
Will I Be Charged Interest During a Personal Loan Deferment?
Generally, yes, though that depends on the lender. Some may not charge interest, while others may forgive interest in certain circumstances, such as a natural disaster or global pandemic. But because this requirement varies between lenders, you usually won’t know until you apply and walk through your deferment terms.
Alternatives to Personal Loan Deferment
#1. Consolidate Your Loans
If your problem isn’t just that you need a lower payment, but that you have too many payments to manage, consider consolidating your loans. A debt consolidation loan rolls your loans into one shiny, brand-new loan with a single monthly payment. In turn, you may find your finances easier to manage – and you may get a lower interest rate, to boot.
>> More: Best Debt Consolidation Loans
#2. Consider Refinancing
If your financial concerns can’t be addressed with a one-time or short-term deferment, consider refinancing your personal loan. Depending on your credit and financial situation, you may apply for a lower interest rate, longer loan term, or both. In doing so, you can lower your monthly payments and give yourself more breathing room long-term.
#3. Work With Your Lender to Create a New Payment Plan
Technically, a personal loan deferment is a payment plan modification. But if you’re experiencing a long-term setback, a short-term suspension may not be enough. You may also lack the credit score to qualify for a refinance (or the capital to pay any new loan fees).
But you’re not out of options. Consider instead asking your lender to modify your loan agreement without a formal refinance. Some lenders will work with you to extend your loan’s term, which lowers your monthly payment. Though you may pay more interest over the life of the loan, smaller payments can be more manageable for tight budgets.
#4. Use the National Foundation for Credit Counseling
Unfortunately, not everyone who applies for a deferment, modification, or refinance receives one. And even if you do, if you have a small enough income or high enough debts, it may not be enough to see you through your situation.
If that’s the case, consider reaching out to the National Foundation for Credit Counseling (NFCC). This nonprofit organization provides free or affordable financial assistance to struggling families and individuals. They can also refer you to an outside credit counselor and help you avoid credit repair scams.
Bottom Line: How Personal Loan Deferment Works
Personal loan deferment doesn’t solve everything, but it can be an effective band-aid for short-term financial difficulties. The first step is to reach out to your lender and ask a few important questions, including:
- How long will your deferment last?
- When will your payment schedule restart?
- Are there fees or penalties for skipping your payments?
- Will your lender accept a partial payment instead of a full deferment?
Remember that deferring a payment doesn’t mean your debt is forgiven – you’ve just pushed off your final payment date by a month or two.