Using Loan Deferment to Overcome Short Term Financial Obstacles
Using Loan Deferment to Overcome Short Term Financial Obstacles
Loan deferment is a financing option that allows borrowers to skip loan payments with lender approval. Depending on the circumstances, lenders allow debtors to roll payments to the end of the loan without inflicting damage on credit reports. Borrowers must abide by deferment policies and may be required to pay interest during the deferment period.
Loan deferment is available for most types of loans including: home mortgage, automobile, student loans, unsecured loans, and credit cards. In order to start the process, borrowers must contact their lender, submit a deferment application, and obtain approval.
Lenders review borrowers' payment history, type of loan, number of payments being deferred, financial records, and credit score. Approval can occur immediately or take several weeks to obtain. The actual process will vary by lender.
One contributing factor as to how many payments can be deferred is the type of loan. The average number of allowable deferments is two to three installments. Some lenders only allow one deferred payment, while others may extend payments up to six months.
Banks often require debtors to provide a letter of financial hardship outlining events which caused the need for loan deferment. Hardship letters are an important part of obtaining approval so it is important to take time to craft a well-written letter. Stick to the facts and do not exaggerate. Include any action taken to reduce financial stress such as eliminating unnecessary expenses, carpooling, or taking a second job.
Students struggling to meet college loan obligations can apply for in-school deferment as long as they are enrolled at least half-time. Loan deferment is also available to graduates who have entered into college loan consolidation. This deferment option is only available to students attending or graduated from accredited schools.
Mortgagors who obtain deferred mortgage payments to prevent foreclosure should request a real estate forbearance agreement. This legal contract prohibits banks from commencing with the foreclosure process unless borrowers' default on the real estate contract.
Always obtain deferred loan agreements in writing. One of the worst mistakes borrowers can make is to enter into verbal agreements. If things go wrong there is no evidence to prove the case. Contracts should include the number of deferred payments, interest rate, fees or penalties, payment schedule, and how deferred payments will be reported to credit bureaus.
Some financial institutions report deferred payments as delinquent accounts. Payments reported as late can lower FICO scores and damage credit history. Depending on current credit scores a reduction of 10 points can place debtors in a lower credit category; making it challenging to obtain credit in the future.
Debtors entering into loan deferment plans should retain loan documents and keep record of phone conversations and email correspondence. Track phone conversations by writing down the date and time of the call, summary of the call, and name of bank representative spoken with. When documents are mailed use a courier service that offers online tracking and verification of receipt.
Loan deferment can help borrowers facing temporary financial setbacks get back on their feet. However, there are disadvantages which should be considered. To ensure a successful outcome, obtain agreements in writing and adhere to the deferment terms.