What is deferment?
Deferment is a pause in loan payments that may apply during specific situations. Common qualifying circumstances include financial hardship, military service and unemployment.
Depending on the loan type, interest may or may not continue to add up while in deferment.
Pros and cons of deferment
Deferment comes with pros and cons.
Pros
- Pause payments: Deferment puts a stop to your loan payments for a set period.
- Interest doesn’t accrue for some loans: Some loans don’t accrue interest in deferment.
- Longer-term relief: Deferment may be available for several years, depending on the lender, loan and circumstances.
Cons
- May not be available for all loans: While common for some loans, such as student loans, deferment may not be available with other types of loans or lenders
- Interest may accrue: Depending on the loan type and lender, you may still be charged interest while your loan is in deferment.
- Approval process: You may have to provide documentation showing you meet specific requirements for deferment, such as unemployment or financial hardship.
What is forbearance?
Forbearance is a temporary stop in loan payments or a reduction of loan payments or interest rates. During forbearance, interest will typically still accrue. If offered by the lender, anyone can apply for forbearance, but approval is at the lender’s discretion. Qualifying circumstances may include financial hardship, medical expenses or a job loss.
Forbearance can also mean different things depending on the context. For example, mortgage forbearance can include reduced and paused payments, as well as an extension to the loan term. Personal loan forbearance terms depend on the lender.
Pros and cons of forbearance
Like deferment, forbearance comes with pros and cons.
Pros
- Temporary relief: Pausing or reducing payments can help borrowers get back on track with their finances.
- Can avoid default: Sticking to a forbearance repayment plan can protect you from defaulting on your loan .
Cons
- Interest accrues: Although you may not be required to make your usual payment, interest generally continues to accrue.
- Higher long-term cost: Unpaid interest may be added to your principal, which can add to your total costs.
- May not improve credit score: Lenders can report financial hardship plans to the credit bureaus, which may impact your score.
Key differences between loan deferment and forbearance
Several factors differentiate deferment from forbearance:
- Interest accrual: Some loans don't accrue interest in deferment. Meanwhile, interest always accrues while in forbearance, though you may qualify for a reduced interest rate.
- Duration of relief: Forbearance is typically limited to 12 months or less, while deferment may be up to a few years for some loans.
- Long-term impact on loan repayment: Deferment may allow you to avoid adding interest to your total debt. Unpaid interest in forbearance may be added to the principal balance.
When to choose deferment or forbearance
Depending on your loan and circumstances, you may not have the option to choose between deferment and forbearance. However, in general, deferment is more favorable because interest may not accrue.
When deciding between deferment and forbearance, these questions can help:
- What option does the lender offer?
- Can you qualify for either option?
- Would a lower payment amount provide enough relief, or do you need a full stop to payments?
- For how long do you need to skip or lower your payments?
- Would interest accrue during deferment or forbearance?
Talking to your loan servicer may help you understand your options and decide what to do next.
Alternatives to deferment and forbearance
There are alternatives to deferment and forbearance, but your options will depend on your loan type.
If you have a mortgage or unsecured debt, like a personal loan or credit card debt, it may help to look into refinancing options. You may be able to reduce your monthly payment by consolidating debt with a personal loan or refinancing your mortgage depending on your individual financial circumstances.
Regardless of your loan type, it can help to look at your finances and consider whether adjusting your budget can help you continue to make on-time payments.
Citi offers personal loans to both existing Citi customers and new Citi customers that meet specific eligibility criteria, including an established credit and income history along with additional factors determined by Citi. If you think you could benefit from a Citi Personal Loan, apply online today.
This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.
