How Does Loan Payment Deferral Work?


More than half of Canadians say they’re living paycheck to paycheck, and if that includes you, you may be seeking a way to reduce the load. Even if you only get a couple of months of reprieve from one bill, the effects will make themselves known immediately. An unforeseen expense may also make it difficult to make ends meet.

What options do you have for reducing the load? Have you looked into loan payment deferral? While not paying a loan bill sounds risky, some lenders will allow you to defer payment until you’re in a better situation.

Looking for information on how to get a deferment period? Wondering how the deferment process works? Keep reading and we’ll introduce you to loan payment deferral and help you explore whether it’s the right choice for you.

How Does Payment Deferral Work?

When you choose deferred payment on a loan, you gain a reprieve from payments for as many months as the deferral lasts. This does not remove the need to make those payments. Instead, it moves those payments to later days.

Think of deferral as pressing the pause button on your loan. A loan with a five-year term will still require 60 payments after a six-month deferral. You will get a six-month reprieve from paying, but will still make all sixty payments.

Why Would I Defer Payment?

The most common reason for loan deferment deals with economic hardship. If you’ve had unforeseen medical expenses, such as a broken tooth or a major illness, you may find yourself unable to cut your usual check for the month. If this happens, your loan servicer will likely be sympathetic and help you remain current.

A major life change can also lead to a deferment period for some loans. If you have student loans, for instance, returning to school allows for deferment.

What Advantages Does Deferment Offer?

The obvious advantage of deferred payment on a loan comes from the temporary relief of the debt burden. If you need that extra $200 per month to pay for a $1000 wisdom tooth extraction, at the end of a five-month deferment you won’t be much worse for wear.

(Well, except for the wisdom tooth recovery. Good luck on that one.)

Deferral can also help in another crucial way when it comes time to check your credit score. While in deferral, your loan remains current. If you find yourself dealing with a short-term or mid-term economic hardship, a deferral allows you to pause payments on your loan without those payments getting reported missed.

Why Might I Choose Alternative Relief?

Finding other solutions to your current debt woes sometimes proves to be a better idea than deferment. If deferred loan repayment sounds too good to be true, consider exploring other options. It does come with some real risks and downsides.

Interest Will Still Accumulate

Unless your agreement stipulates otherwise, which doesn’t happen often, you’ll still accumulate interest while your loan goes through deferment. You won’t decrease the balance of your loan, either, which can lead to even higher interest.

On a $10,000 loan, you can expect to accumulate a few hundred dollars in additional debt during your deferment period. Consider the long-term ramifications of this during your assessment of the situation, and use a calculator to determine how much of an impact the deferral will make.

Not All Loan Servicers Will Allow It

The option to offer deferred payment options rests with your lender. While lenders want you to pay back your loan and will often show some flexibility if you lay out your situation, they don’t have to allow you to pursue a deferral.

Check your loan agreement for whether it explicitly allows a deferral. If it doesn’t, you may still negotiate with your lender but should expect a more difficult road through the process.

What to Do When Getting a Deferral

During and after your deferral, make sure to check your credit report and ensure that the deferral gets recorded properly. Part of the reason to defer a loan comes from the positive impact on credit scores. If you don’t get that, you’re missing out on a lot of the upside.

Make sure to continue paying your loan until the deferment actually goes through. When you apply for a deferral, take note of when the deferment period starts and make all payments until it begins.

Long-Term Solutions

A deferral puts your loan on pause, but sometimes the pause button won’t be enough. If you do choose a deferral over other debt-relief options, take some time to think about long-term solutions for reducing your debt or your monthly payments.

A consolidation loan might provide long-term relief and reduce your monthly payment. You could also consider looking for local loans and grants. Some lending institutions have continued COVID-19 debt relief plans, so if your debt issues have a COVID-related component, try reaching out to those as well.

Remember that a deferral doesn’t solve your debt and just moves it into the future. If you use that time in a constructive manner, you won’t need to pursue the same relief in the future.

Should You Press Pause?

Payment deferral can offer a safe, credit-score-friendly way out of an emergency. It can also give you time to address long-standing issues with your overall debt situation. As long as you use the time well, it can serve as a stepping stone to long-term debt stability.

If you need a shorter-term loan to make it through your current financial situation, though, try reaching out to us. We offer convenient, short-term cash loans as an alternative to traditional lenders.

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