A loan deferment allows a borrower to temporarily postpone a loan repayment, relieving them during financial crunch situations. However, it includes long-term costs the borrowers must bear. Therefore, before pursuing this option, understanding the risks, benefits, eligibility, and requirements of a deferment on Personal Loan is essential.
The following sections will examine the working of Personal Loan deferment, its eligibility, impact, and other important things to know.
What is Personal Loan Deferment?
Personal Loan Deferment is a temporary, pre-approved break from loan repayments on the outstanding balance. To get a loan deferment, the borrower must speak with their loan provider and explain their situation, whether their financial condition is challenging due to a job loss, reduced income, medical treatment, or national emergency.
Most lending institutions reserve Personal Loans with deferred payments for borrowers with financial hardships. While loan companies are free to decide whether to offer loan deferments to their customers, they usually prefer deferring payments rather than starting collection proceedings.
How Does Personal Loan Deferment Work?
During financial hardship, a Personal Loan borrower can contact their lender to explain their condition. Lenders typically demand supporting documentation, such as medical bills and proof of unemployment, to evaluate the request.
If the lender approves loan deferment, the borrower gets respite from EMI payments for a pre-approved period. However, the Personal Loan interest rate will keep accruing, and the borrower must resume regular payments after the end of the deferment period along with accrued interest. As a result, the loan balance increases and the repayment term extends beyond the original plan. Hence, reading the deferment document carefully is essential to understand the terms and conditions properly.
Who is Eligible for Loan Deferment?
To request a deferment on a Personal Loan, borrowers must contact their loan providers and ask for any eligibility conditions they have laid down for approval. Most lending institutions require ample evidence showing financial difficulty, such as proof of unemployment, medical bills, etc. A borrower is eligible for loan deferment if they fulfil the following conditions:
- Lost their job or their income reduced
- Medical emergency in the family
- Pandemic like Covid-19
- National emergency like war or political hardship
- Natural or man-made disaster
How Does Loan Deferment Affect Your Credit Score?
When a lender approves a loan deferment, they report it to the credit bureau as a deferred loan. That means the credit bureau does not mark the missed EMIs as late or delinquent payments in the credit report. Therefore, Personal Loan deferment is beneficial as it prevents a reduction in the credit score due to missed EMIs. However, the deferment may have long-term consequences on the credit score.
While the deferred payments do not directly impact the credit score, the accruing interest during the period increases the loan balance. Once the deferment period ends, the borrower may find the EMIs difficult to pay on time. A high loan balance affects the credit score by increasing the borrower’s debt-to-income ratio. Therefore, using the loan deferment wisely and having a solid plan to manage the finances later effectively is essential to save the credit score.
Types of Deferment Periods on Loan
Let’s look into the deferment periods on different types of loans:
Student Loans
Loan deferment on student loans is accessible during or after education, giving the borrower some time to gain an income source.
Mortgage Loans
The first payment of a new mortgage loan is usually deferred. That means a borrower taking a mortgage loan in June is not required to make an EMI payment until August.
Personal Loans
Personal Loan borrowers may request a deferment on Personal Loan during financial hardships due to genuine reasons. However, the Personal Loan interest rate keeps accruing and increases the outstanding balance.
Auto Loans
Auto loan borrowers may also request a loan deferment if they find it challenging to repay the EMIs on time. It may happen at any time during the loan tenure.
Loan Deferment vs. Forbearance
Let’s look into the difference between loan deferment and forbearance:
| Parameter | Loan Deferment | Loan Forbearance |
| Eligibility | Unemployment, reduced income, medical treatment, economic hardship, national emergency, etc. | Financial hardship due to any reasons acceptable to the loan provider |
| Length | Depends on the deferment type | Up to three years in instalments of 12 months at a time |
| Types | Single type | Two types – general forbearance and mandatory forbearance |
Conclusion
Personal Loans with deferred payments provide temporary relief from EMI payments without directly hurting the borrower's credit score. Still, it often leads to higher outstanding balances and extended repayment terms. Maintaining open and proactive communication with the lenders is necessary to make informed decisions and utilise the loan deferment facility wisely. If the current loan plan does not suit the borrower's financial capacity, one may consider alternatives like loan restructuring, balance transfer, forbearance, and modification.
Making informed decisions and considering the long-term effects of Personal Loan deferment minimises the impact on credit and balances the overall financial well-being.
Frequently Asked Questions
1. Will loan deferment affect my eligibility for future loans or financial assistance?
If the lender approves a loan deferment, it does not directly impact the borrower’s credit score. In fact, requesting a deferment demonstrates a borrower’s best intention to repay the loan rather than simply missing the EMIs. Therefore, deferment does not affect eligibility for future loans or financial assistance.
2. How long can I defer my loan payments?
The deferment period differs according to the lender’s policy, the duration of the borrower’s financial hardship, and the time they require to rebalance their finances.
3. Can I defer multiple loans simultaneously?
During financial hardships, the borrower may request deferments for multiple loans simultaneously. However, it depends on the lender’s discretion to approve the request based on the evidence provided.
4. Is interest accrued during the deferment period?
Yes, the interest keeps accruing during the deferment period, and the lender adds it to the outstanding loan balance at the end of the Personal Loan deferment.
5. What happens at the end of the deferment period?
The regular repayment schedule resumes after the end of the deferment period. The lender adds the accrued interest to the loan balance and extends the loan tenure to make the EMIs manageable.
