What Is a Payment Deferral and How Does It Work?

A payment deferral is a formal agreement with a lender that allows a borrower to skip one or more payments on a loan. This arrangement is sought during periods of temporary financial hardship, providing short-term relief from an immediate payment obligation. A deferral postpones, not forgives, the owed payment until a later, specified time. This provides breathing room for the borrower without the loan going into default or being reported as delinquent to credit bureaus.

The Mechanics of a Payment Deferral

When a payment is deferred, the skipped payments are added to the end of the original loan schedule, extending the loan’s term. For most installment loans, such as auto or personal loans, this means the term is extended by the number of months deferred. For example, if a borrower defers three monthly payments on a 60-month loan, the loan will now require 63 months to be paid in full.

During the deferral period, the loan balance continues to accumulate interest daily even though payments are paused. This accrued interest is often subject to capitalization, a process where the unpaid interest is added to the principal balance of the loan. This increases the total loan cost because future interest calculations will be based on this new, higher principal amount.

For example, on a $30,000 loan with a 6% interest rate, a one-year deferment could result in $1,800 of accrued interest. If this interest capitalizes, the new principal balance becomes $31,800. This change can lead to a higher monthly payment once the deferral ends or a larger total interest paid over the extended life of the loan. Some borrowers may have the option to pay the accruing interest during the deferral period to avoid capitalization.

Payment Deferral Compared to Forbearance

While lenders may use the terms payment deferral and forbearance interchangeably, they describe different ways of handling missed payments. Borrowers should focus on the specific terms of the relief agreement offered by their lender, as the primary distinction lies in how the missed payments are managed after the relief period concludes.

In contrast, a forbearance agreement often requires the borrower to repay the missed amounts more immediately. Forbearance involves a temporary pause or reduction in payments. Afterward, repayment might be structured as a lump-sum payment of all missed installments or as a plan that adds a portion of the past-due amount to each subsequent regular payment, resulting in temporarily higher monthly payments.

Because of these different repayment structures, an arrangement where payments are moved to the end of the loan can be a less financially demanding option for borrowers who have recovered from a hardship but cannot afford an immediate increase in their payment obligations.

The Request and Approval Process

To initiate a payment deferral, a borrower must contact their lender or loan servicer before a payment is missed. Lenders are not obligated to offer deferrals but may consider it for borrowers facing a temporary hardship. The borrower will need to explain their financial situation and the reason for the request, such as a job loss or medical emergency.

Lenders may require documentation to support the claim of hardship, and the approval process and terms can vary significantly depending on the lender and the type of loan. Borrowers should ask specific questions about how interest will be handled and how the deferral will be reported to credit bureaus.

Before stopping any payments, the borrower must receive a formal, written agreement from the lender that details the terms of the deferral. This document should specify the duration of the deferral period and confirm how the missed payments and any accrued interest will be managed. Having this agreement in writing protects both the borrower and the lender and ensures there are no misunderstandings about the arrangement.