The Real Cost: Deferring Your Personal Loan Payment

Deferring a personal loan allows you to pause repayment to your lender during financial hardships.

Most people who take loans intend to repay them when instalments are due. However, due various reasons, you may fail to pay your loan as scheduled. Luckily, you can opt for a loan deferment option whereby you delay your loan payment to some time in the future.

With this option, your lender lets you initiate a personal loan deferment at a fee. It could be a great option if you require short term financial relief.

However, you should be careful when deferring your personal loan, as it can be an expensive choice.

We’ll discuss how personal loan deferment works, how it affects you, and the real cost of deferring your personal loan in Singapore.

Table of contents

• Overview: Deferring loan payments
• Advantages of deferred personal loans
• Disadvantages of deferred personal loans
• Alternatives to personal loan deferments

Overview: Deferring loan payment

Loan deferral is a time period that you agree upon with your creditor, during which you’ll not pay the loan interest and principal. Depending on your loan balance, the interest may accrue during the loan deferral, implying that extra interest is added to the outstanding amount at the end of the period. 

Generally, a deferred payment loan option is available for various loans, including personal loans. Other loans with deferred payments options may include student loans and loans for medical bills during financial hardships.

To secure a deferred payment loan option, you need to discuss the prevailing circumstances with your creditor, whether facing a general disaster, losing your job, or undergoing expensive medical treatment. Ideally, lenders offer deferment plans to individuals experiencing justifiable financial hardships.

Although lenders are not obliged to offer loan deferrals for personal loans, most prefer to provide such options for profit purposes. What this means is that they offer a customer a temporary break instead of initiating a new collection proceeding.

How does deferred payment work?

Upon initiating a deferment option, you essentially agree to withhold loan payment until a future date. 

Before agreeing to defer payments, you need to confirm when it starts and ends. The two dates are essential since you must make payments after the deferral period. Basically, lenders offer deferrals at a one-month interval but the period can be longer.

If you are still undergoing financial hardships at the end of the deferred period, you can contact your lender to request for additional deferment. However, most lenders limit the number of times you can request for suspension while others consider your case. 

For instance, if your creditor gives deferments in one-month intervals, you must contact them every month until you settle payments or secure an alternative solution.

Is interest charged for deferred payment?

Even if your creditor approves a deferment option, interest might still accrue on the loan. Thus, if you delay repayments, it won’t be for free because you’ll have to settle the interest later.

To be on the safe side, you can review your most recent statement to understand the interest rate charges. Most often, lenders split your payment into two; interest and principal options. 

The interest charged is the cost of deferral, which accompanies your loan. Subsequently, you’ll pay the amount due when the deferment ends.

Other times, creditors may be lenient and won’t charge you interest for natural disasters, including a global pandemic and other natural disasters affecting many people that are beyond individual control. 

However, leniency isn’t a requirement, and each lender has its own rules for charging interest in various situations.

Does deferring loans affect your credit rating?

Typically, your credit score should remain the same even if your creditor allows a loan deferment plan.

Ideally, your creditor reports to the credit bureaus each month on timely, delinquent or late payments. Normally, your credit score is harmed when you make late payments (or default). 

For deferred payment, they’ll report a deferred loan. This implies an agreement not to make the repayment for a particular month, so any omitted payment won’t lower your credit score.

However, you need to be careful when your deferment ends. If you fail to make payments after the end of the deferral or neglect applying for another deferment, you’ll be charged some late fees, and your credit score can worsen. 

How to calculate a personal loan deferment cost?

Your creditor usually provides you with an online deferred payment loan calculator. This automated calculator allows you to input the loan amount, applicable interest rate, and the deferred period. Later, it generates the accumulated interest payable after the end of the deferred period.

You can conveniently use this figure to determine whether the deferment plan is cheap or an expensive option.

Advantages of deferred personal loans

It is essential to understand the benefits and drawbacks of deferring a personal loan as a borrower. Here are some advantages of deferring a personal loan:

• It minimises the chances of incurring late fees
• It allows you to plan finances during hardships
• Provides you with a grace period to settle financial obligations
• It minimises the chances of losing collateral used for secured loans
• Reduces the stress of constant repayment

Drawbacks of deferring personal loans

Even though it offers you some financial relief, deferring a personal loan may come with multiple drawbacks, including:

• Interest accrues over the deferred period which may increase the cost of the loan.
• The accumulated interest increases the outstanding loan balance thereby prolonging your repayment period.
• Some lenders may subject you to additional fees which effectively increases the cost of the loan.
• Your lender may require you to prove financial hardship during the appraisal process. It can delay the deferment since you may have to provide documents demonstrating your financial crisis.

Alternatives to personal loan deferment

In some cases, you might not be able to afford loan payments but at the same time not be willing to seek a loan deferment option. Your lender may also deny your deferring request even after meeting all the requirements. In this case, you could consider other alternatives as listed below.

Consider debt consolidation or refinancing

If you have a favourable credit score, consolidating or refinancing your debt with a lower-interest loan can be a great way to minimise costs.

If you have several unsecured debts from different sources, such as credit cards, you can combine the loans into one through debt consolidation to ease the payments. This can be a great alternative if the debt consolidation interest rate is lower.

Contact other financial institutions

Some financial institutions such as mortgage lenders and banks may offer resources to those affected by a major pandemic. If you face financial hardships due to such pandemics, you can contact your credit card company, insurer, bank, or mortgage lender to see if they can offer assistance.

Seek alternatives to a personal loan

If you are considering not adding to your debts, other lending bodies may offer assistance. They may include non-profit organisations, charities, and religious groups within your locality. You can search online for such options.

Ask your lender for an altered payment plan

If you have a long-term financial hardship, it could be a better idea to request an extended loan term from your lender. This distributes your payments over a more extended period. Although it can be more expensive, it reduces your monthly payments, making them more easily fit in your budget.

Discuss with a credit advisor

If you cannot make your payments and your lender is unwilling to offer this option, consider discussing with your credit advisor. 

An advisor helps you determine whether a moratorium is the right path or may advise on an alternative that is more favourable. 

3 things to know before deferring your personal loan

Deferring your personal loan can be a great option during a difficult financial period. It protects you until you fully recover. However, it's essential to know its terms and conditions to minimise the risk of getting into more financial trouble.

To achieve this, here are things you should never forget before making it your favoured option:

#1: Interest Rate

Even though you won’t be paying your loan during the deferment period, interest on the outstanding balance still accrues. 

Therefore, it's important to get all the information about interest and other charges from your lender before choosing this option.

#2: Credit rating

One advantage of deferring your personal loan is that it doesn’t affect your credit rating. However, like all other facilities it can result in a bad credit score if you fail to make the payments after the deferred period.

#3: Payment dates

It’s important to be aware of when your deferment date starts and ends as this protects you from making late payments resulting in a bad credit score and late fee charges.

Bottom line

Deferring a personal loan can offer some relief during financial hardships or unforeseen circumstances. However, it comes with an applicable interest rate that you must pay at the end of the deferred period. Therefore, you can decide whether it's a viable solution by assessing all the available options including the cost of the loan. Also, identify whether it is cost-effective and efficient for your financial needs before using it as your next option.

Besides deferring your loan, debt consolidation could be a possible alternative to help make your repayments more manageable. Compare the best debt consolidation plans and benefit from cashback when you apply!