How Does Personal Loan Deferment Work? Understanding Your Options and Costs

Many lenders offer short-term personal loan deferment plans for those who can’t make their payments due to financial hardship. These plans let you extend your loan term in exchange for a break from your regular monthly payment.

Temporarily pausing your payments usually isn’t free. Most lenders charge interest while the loan is in deferment. Since you’re extending the repayment period, you often wind up paying more interest overall. But if you need short-term relief, deferment may be an option.

What is personal loan deferment?

Loan deferment, or forbearance, is when a lender allows you to delay or reduce repayments on a personal loan without violating the loan agreement.

Typically, when you defer a loan, you extend the loan term by an agreed-upon deferral period. Some lenders allow deferred payments for a finite period, like up to 90 days, before resuming regular payments.

Usually, the extra payments get tacked on to the end of the loan. So if your original loan term ended in September, but you got a 90-day deferment, you’d need to make payments until December.

Most personal loan lenders continue to charge interest during the deferred period. For example, if you defer three months of payments on a 36-month loan, and the loan keeps accruing interest, you’ll end up paying 39 months of interest.

When is personal loan deferral a good option?

Deferment can be a good option if you’re experiencing a temporary financial hardship that you can document. For example, if you lost your job and expect to resume payments once you start working again, you may be a good candidate for deferment.

Or if you’re facing an unexpected and essential expense, like repairs for a car you need to get to work, it may be worth asking your lender to pause payments for a few months. You can then apply your loan payment money to the expense.

When to avoid deferment?

Deferment can provide temporary relief, but it isn’t a good solution when you’re dealing with chronic financial problems. A payment pause will typically prolong your debt payoff timeline and cost more in interest. If you don’t think you’ll be able to resume making full payments in the foreseeable future, you may need to explore long-term solutions, like loan modification, which permanently changes your loan terms.

Calculate the cost of deferring payment

Make sure you know whether your personal loan will continue to gather interest so you can calculate how much deferring will cost.

How to defer personal loan payments

If you can’t make payments on a personal loan, here are the steps to defer.

1. Contact your lender. Reach out to your lender to discuss deferment options. Lenders aren’t required to offer deferment, but most will consider some type of short-term payment relief. It’s in their interest to work out a plan with you, rather than sending your account to collections.

2. Provide supporting evidence. Lenders may ask for documents or proof of hardship. Depending on your circumstances, providing recent bank statements, tax returns, unemployment or disability benefit statements, a job termination letter, medical bills, a divorce or separation agreement, or a death certificate could help bolster your case. 

3. Prepare for a deferment decision. Lenders may not approve hardship applications instantly, so be prepared to maintain your loan in good standing while the lender considers your situation. 

If you start making late payments or skipping them entirely without notifying your lender of a problem, your credit may be impacted, and your lender may consider your personal loan in default.

How does loan deferment affect your credit?

Your credit score shouldn’t change if you defer personal loan payments. Some lenders will report that your loan is in deferment to the credit bureaus. But unlike a loan that’s listed as delinquent or in collections, deferment status doesn’t hurt your credit score.

Still, you should check your credit reports to be sure payments are being recorded correctly. You can check your free TransUnion credit report with NerdWallet, or visit AnnualCreditReport.com to see your reports with the three major credit bureaus (the other two are Equifax and Experian).

Your credit score will be impacted, though, if the lender hasn’t approved your application for deferment and you stop making payments. If you have applied for deferment, but your monthly payment comes due before the lender approves your application, try to make the payment to avoid a hit to your credit score.

Alternatives to deferment during financial hardship

Here are ways to get relief if you’re struggling to make personal loan payments.

Consolidate or refinance your loan. If you have good or excellent credit, refinancing your loan or consolidating your debts with a lower-interest loan can be a way to cut costs.

If you have multiple sources of unsecured debt like credit cards, a debt consolidation loan can roll all your debts into one, making payments easier to manage. This option is usually best if the debt consolidation loan’s annual percentage rate is lower than the combined rate on your credit cards.

» MORE: Best debt consolidation loans

Ask about loan modification. If you need more than a temporary break from payments, ask your lender about loan modifications. Some lenders will agree to permanently change your personal loan terms by extending your repayment period, lowering your interest rate or even reducing your principal in rare cases.

Consider credit counseling. If you’re overwhelmed by bills, a nonprofit credit counseling agency could help you make a budget and develop a realistic plan for tackling debt. Look for an organization that’s a member of the National Foundation for Credit Counseling or the Financial Counseling Association of America.