Whether it’s a medical emergency, a car repair, a job loss, or any other large unexpected expense, Canadians often turn to personal loans during difficult times. But what happens when a difficult time lasts longer than expected and you can’t make your loan payment?
Fortunately, there may be a way for you to defer your loan payments, so you can temporarily relieve some of your financial burdens and get your finances back on track.
Key Points:
- A loan payment deferral allows you to pause your scheduled loan payments and push them out to a later date.
- Deferred payments are not cancelled or forgiven, but are rather postponed.
- Interest continues to accrue on the outstanding loan balance, which means you could owe more over the life of the loan.
What Is A Personal Loan Payment Deferral?
A personal loan payment deferral involves temporarily postponing scheduled loan payments. This doesn’t mean the payments are forgiven; instead, they’re delayed to a future date.
During the deferral period, you don’t have to make regular payments, but interest may still accrue depending on the terms of the agreement. This, in turn, will increase the amount you originally set out to pay.
How Do Loan Deferrals Work?
When you request a loan payment deferral, your lender will assess your financial situation and determine whether you can qualify. If approved, your deferral details will include the following:
- The duration of the deferral
- Whether interest will accrue
- How the deferred payments will be handled afterward
After the deferral period ends, you may be required to do one of the following:
- Resume making regular payments (with a higher monthly amount)
- Extend the loan term to accommodate the missed payments
- Make a lump-sum payment to cover the deferred amount
Payment Deferral Options
Loan deferral arrangements come in several forms, depending on the lender, and loan contract. Here are the more common types of loan deferral options:
Full Payment Deferral
With this arrangement, both principal and interest payments are paused for a set period. That means you won’t have to make any payments during this time, though interest will still continue to accrue. You’ll eventually need to pay this interest, as well as the deferred principal amount. The interest is added to your loan balance just like the principal portion.
Partial Payment Deferral
Instead of deferring the full payment amount, you make reduced payments for a temporary period.
Skip-A-Payment
With this option, you can skip a monthly payment, which gives you a small financial break. Again, interest still accrues. This option is best for occasional use and when you’re not suffering serious financial hardship.
Extended Term Deferral
With this arrangement, your loan term is extended to accommodate missed payments. Your loan costs will be spread out over a longer period, which can lower your monthly payments post-deferral, but leads to more interest paid over time.
Learn more: How To Get A Loan Online With Affordable Monthly Payments
How Do I Get A Loan Payment Deferral?
Especially after the recent pandemic, many of Canada’s major banks have streamlined the deferral process and now offer online forms or dedicated sections in their online banking portals to initiate hardship requests. While a conversation is often still required, the initial request can frequently be made online.
For example, Fairstone provides financial relief options to clients facing financial challenges, such as payment deferrals, extending your loan term, or arranging partial payments. You’ll need to reach out directly to your local branch, as deferrals are not automatically granted.
Pros & Cons Of Loan Payment Deferral
Loan deferrals can be a strategic tool during financial hardship, but they also come with certain drawbacks to consider.
Pros
You can benefit from the following perks by deferring your loan payments:
Immediate Financial Relief: Deferring your loan payments can free up cash for essentials, like rent, groceries, and utility bills.
Protect Your Credit: Missing loan payments can damage your credit score. A loan deferral can help you avoid this by keeping your account in good standing.
Avoid Collections & Late Fees: Deferrals prevent your loan from going into delinquency, which can lead to late fees and collection efforts.
Flexible Repayment Options: Many lenders offer a few ways to handle deferred payments to suit your financial comfort level, such as extended terms or adjusted monthly payments.
Cons
While deferrals offer some time to get your finances in order, they’re not without their potential risks:
- Interest Accumulation: Interest continues to accrue during the deferral period, which means you’ll end up paying more over the life of the loan.
- Higher Future Payments: At the end of the deferral period, your monthly payments may increase to make up for the missed payments.
- Extended Loan Term: If you extend your loan term, you’ll be in debt for longer.
- False Sense Of Security: Loan deferrals are only temporary. Without a sound recovery plan, you could wind up in the same position as you did before.
Learn more: What Happens If You Make A Partial Payment On A Loan?
Do Loan Payment Deferrals Affect Credit Scores?
Loan payment deferrals may or may not affect your credit score, depending on how the deferral is handled.
When Deferrals Don’t Hurt Your Credit
Your credit score should be safe in the following scenarios:
- Formal Agreement Arranged: If you’ve arranged a deferral with your lender before missing a payment, it shouldn’t damage your score.
- Account Status Updated: Your account should be marked as “deferred”, which means it’s not delinquent, despite you not having made any payments during the deferral period.
- No Missed Payments: As long as you don’t miss payments before the deferral is approved, your credit score should not be affected.
When Deferrals Can Hurt Your Credit
There may be cases where your credit score can be negatively affected:
- Unapproved Deferrals: If you stop making payments without entering a formal agreement with your lender, your missed payments will likely be reported to the credit bureaus, which will lower your score.
- Misreporting: It’s possible for lenders to incorrectly report a deferred account as late. If this happens, you’ll want to pull your credit report and dispute the error on your report, after speaking with your lender. By monitoring your credit, you can correct any errors on your report and make arrangements with your lender so it doesn’t happen again.
- Future Missed Payments: If you don’t resume loan payments after the deferral period ends, any future missed payments will be reported to the credit bureaus and will negatively impact your credit score.
What Happens If You Miss A Loan Payment?
Missing a loan payment can lead to various financial consequences. Whether you hold a loan with an alternative lender or one of Canada’s Big Banks, the consequences are fairly similar, depending on how long your payment is overdue:
- Late Fees: Most lenders charge a penalty for missed payments. The fee amount can vary widely, depending on the loan type and lender.
- Extra Interest: If your loan terms include penalty interest, you could be charged extra interest on the outstanding balance.
- Impact On Your Credit Score: If your payment is more than 30 days late, lenders typically report it to credit bureaus, which can drop your credit score by several points.
- Loan Default: Continued missed payments may lead to default. If the loan is secured, you risk losing possession.
- Collections: After multiple missed loan payments, lenders may sell your account to a collection agency, which can further damage your credit.
Alternative Options When Struggling to Make Payments
If you’re struggling to make your loan payments but deferring your payments is either not preferred or unavailable, options may be considered:
Debt Consolidation
If you’re carrying several high-interest debts, consider consolidating them into one single payment. This involves taking out a debt consolidation loan, ideally at a lower interest rate, which you can use to pay off all your outstanding debt. You’ll then be left with a single payment, and can save money in interest over the life of the loan if you can secure a lower rate.
Learn more: Debt Consolidation Loans
Refinancing
Refinancing a loan means replacing it with a new loan with better terms and a lower rate. This option makes most sense if you’re able to secure a lower interest rate, whether because you have good credit or due to reduced market rates.
Hardship Programs
Many lenders offer financial relief programs for borrowers facing financial difficulty. For example, the Student Loan Repayment Assistance Plan (RAP) provides temporary payment reductions for qualifying students.
Speak To A Credit Counsellor
A credit counselling agency can help you create a workable budget or come up with a debt management plan. They can also negotiate with your creditors so you can avoid loan default and protect your credit score.
Reassess Your Budget
Sometimes the solution is simple enough that a readjustment of your budget is all that’s needed. Budgeting involves tracking your income and spending to ensure your funds are allocated approximately so you’re not left spending more than you earn. Budgeting can be cumbersome and boring, but you can simplify things by using one of the many easy-to-use budgeting apps available.
Other Types Of Loans That You Can Defer
Loan deferrals are available for various loan types, including the following:
| Mortgages | Many lenders offer a “skip-a-payment” option or similar deferral programs during financial hardship. |
| Car Loans | Car loan payments can be deferred, depending on the loan contract, though interest will likely continue to accrue. |
| Student Loans | Many student loan programs allow for deferral, especially during enrollment in school. |
| Credit Cards | Many credit card issuers waive the minimum payment requirement on credit cards for a short period without penalty. |
Bottom Line
Loan payment deferrals can be a financial lifesaver when you’re struggling to cover your bills. But that doesn’t mean you’re in the clear, as you’ll need to make up for these postponed payments at some point. Make sure you understand the terms of a loan deferral program and use the break in payments to improve your financial situation.
