If you’re struggling to keep up with loan payments, your lender may offer relief options. One of the most common is deferment, which lets you temporarily pause your payments.
What is loan deferment, and when does it make sense to use it? Here’s what borrowers need to know.
What Does Deferment on a Loan Mean?
Loan deferment involves pausing loan payments, typically for a set period.
Lenders may defer a loan if you’re dealing with financial troubles. For example, if you lose your job, your lender might let you put off making payments for a few months. The exact definition and specifics of loan deferment can vary based on the type of loan, your lender, and your individual circumstances.
You might be familiar with deferment as an option for student loans. However, some other lenders may allow it, too. The best way to find out is to get in touch with your lender directly.
Does Interest Accrue During Deferment (and Will You Pay More Overall)?
In most cases, interest continues to accrue during deferment. While you’re not required to make payments, the balance doesn’t stay the same.
If you don’t pay the interest as it builds, it may be capitalized at the end of the deferment period. That means it’s added to your principal, increasing the amount you owe.
Here’s how that can play out. Say you have a $5,000 personal loan with a 10% interest rate and defer payments for 12 months.
Over that year, the loan accrues about $500 in interest. If you don’t pay it, your balance will increase to $5,500 when the deferment ends. Future interest is then calculated on that higher amount, raising your total cost over time.
Is Deferring a Loan Payment Bad?
Needing to defer a loan payment does not mean you’ve done something wrong. In many cases, deferment is a practical option when you’re going through a temporary financial setback.
That said, it is not without cost. If unpaid interest capitalizes, your loan balance increases, which means you’ll pay more over time.
Still, deferment can be a worthwhile trade-off if the alternative is missing payments entirely. It can give you breathing room during a difficult period while keeping your loan in good standing.
If you can afford it, paying at least the interest during deferment can help prevent your balance from growing through capitalization.
When Does Interest Not Accrue During Deferment?
Although interest typically accrues during loan deferment, there are exceptions. For example, if you have a subsidized student loan, the government will pay the accrued interest during deferment periods. However, if your subsidized loan is in forbearance, the accrued interest will be your responsibility.
What Are Valid Reasons for Deferment?
Your lender will usually ask for a valid reason before okaying loan deferment. Here are some common reasons for deferring a loan:
- Loss of your job
- Divorce or the death of a spouse
- Hurricanes, wildfires, and other natural disasters
- Temporary financial hardship
Student loan servicers often allow loan deferment in additional circumstances, such as the following:
- Being enrolled in school (usually at least half-time)
- Being enrolled in a graduate fellowship program
- Being on active duty during a war, military operation, or national emergency
- Undergoing cancer treatment
- Being enrolled in an approved rehabilitation program
- Losing your job
Federal student loan servicers also permit loan deferral during times of economic hardship. That usually means making less than 150% of the poverty line or receiving any kind of state or federal assistance, such as Supplemental Nutrition Assistance Program (SNAP) benefits.
Can You Defer Private Loans, and How Do You Request It From a Lender?
Some private lenders allow deferment. When it comes to student loans, private lenders aren’t required to offer deferment options like federal lenders are.
However, if you think you’ll miss a payment or have already missed one, you may want to request deferment from your lender. Here’s how.
Contact Your Lender
Some lenders have online tools that let you apply for loan deferment within your user portal.
If you prefer (or if you can’t do it online), you can call your lender and ask them how to proceed. They may be able to give you more detailed information over the phone.
Submit Any Required Documents
Some lenders may require you to prove a hardship. You should promptly send in any documents they ask for.
Keep Making Payments
Don’t stop your payments until the lender approves your request in writing. Otherwise, the loan could default.
Is Loan Deferment the Same as Forbearance or Loan Deferral?
Not all loan-payment pauses are the same. While the terms “loan deferment” and “loan deferral” are often used interchangeably, deferment and forbearance are different.
The exact differences between the two depend on the type of loan and the lender. Here’s a closer look at deferment vs. forbearance for two loan types, student loans and mortgage loans.
Student Loans
If you have student loans, you may already be familiar with deferment and forbearance. Both options allow you to temporarily pause payments, but they do not work the same way.
Deferment is often the better option when you qualify. For certain loans, such as subsidized federal student loans, interest does not accrue during deferment.
With forbearance, interest typically continues to accrue on all loan types. That means your balance can grow even while payments are paused. For unsubsidized loans, interest accrues in both deferment and forbearance.
Mortgage Loans
In mortgages, the difference between deferment and forbearance is more significant than with other types of loans.
With mortgage deferment, missed payments are typically moved to the end of the loan term. In some cases, interest on those deferred amounts does not accrue. You may be required to repay the deferred balance as a lump sum at the end of the loan or through a modified repayment plan.
Mortgage forbearance, on the other hand, is a short-term pause in payments during financial hardship. It usually lasts three to six months, although some lenders may allow extensions depending on your situation.
During forbearance, interest generally continues to accrue, and you will still be responsible for repaying the missed payments once the forbearance period ends.
Is Deferment Right for You?
If you’re dealing with financial stress and are at risk of missing payments, loan deferment can provide temporary relief. Many lenders are willing to work with borrowers, especially if you reach out early.
The key is to be proactive. Lenders are generally more flexible when you ask for help before you fall behind.
Taking action sooner rather than later can help you avoid additional stress and give you more options to get your finances back on track. Even a short deferment period can provide the breathing room you need to stabilize your situation.
