What is a Personal Loan Deferment? Meaning and Benefits

• Loan deferment means postponing loan repayments for a specified period.
• It is generally offered to borrowers facing financial difficulties.
• Interest may continue to accrue during the deferment period.
• Eligibility depends on the lender’s policies and the borrower’s repayment history.
• It can impact the total loan cost and credit score.

Managing a personal loan can sometimes become difficult, especially during financial hardships. In such cases, loan deferment can offer relief. But what exactly does it mean, and how does it work?

A personal loan is an unsecured loan that helps individuals meet their financial needs, such as medical emergencies, weddings, home renovations, or debt consolidation. Unlike home or car loans, personal loans do not require collateral. Banks and NBFCs (non-banking financial companies) offer these loans based on the applicant’s income, credit score, and repayment ability.Personal loans offer flexible tenure and fixed EMIs, making them a popular financing option. However, financial hardships can make repayment difficult, which is where loan deferment becomes relevant.

In simple terms, loan deferment means temporarily suspending loan EMI (equated monthly instalment) payments for a certain period. This option is usually available to borrowers facing financial hardships due to job loss, medical emergencies, or other unavoidable circumstances.

When you apply for a loan deferment , your lender allows you to pause your EMI payments for a fixed period. However, there are certain conditions:

• Interest may continue to accumulate even if you are not paying EMIs.
• The deferment period does not cancel your loan but extends the repayment tenure.
• Some lenders may charge a processing fee for granting deferment.

For example, suppose you have a personal loan EMI of ₹15,000 per month, but due to a medical emergency, you request a three-month deferment. Your bank approves it, meaning you won’t have to pay EMIs for those three months. However, at the end of the deferment, your loan tenure will be extended, or your EMI amount may increase to cover the unpaid interest.

Not every borrower qualifies for a loan deferment . Lenders evaluate certain criteria before approving a deferment request, such as:

• A valid reason for financial hardship (e.g., medical emergency, job loss, natural disaster).
• A good repayment history before requesting deferment.
• Type of loan and lender’s specific policies.
• Borrower’s income and repayment capacity post-deferment.

Loan deferment options vary based on the lender and the borrower’s situation. Here are the common types:

Interest-free Deferment

Some lenders may allow a deferment without interest accruing. This is rare and usually available for government-backed schemes. For instance, in the case of federal or government student loans, students may be offered interest-free deferment for loans subsidised for a specific period. This will be in case of enrollment in school or college or during a difficult phase. However, the interest will continue to accrue even on these unsubsidised loans during deferment.

Interest Accrual Deferment

Most banks and NBFCs offer this type, where interest accumulates on the loan amount even during the deferment period.

Partial Payment Deferment

Borrowers may be required to pay only the interest component while skipping the principal amount during deferment.

Pros

• Provides temporary relief during financial crises.
• Helps avoid loan default and its consequences.
• Gives time to stabilise finances before resuming EMI payments.

Cons

• Interest accumulation can increase the total loan cost.
• Extended loan tenure means a longer repayment period.
• Some lenders may report deferment to credit bureaus, impacting credit scores.

Also Read: How to Calculate EMI for Personal Loan?

Before opting for loan deferment , consider other options:

Restructuring the Loan

Request your lender to lower the EMI amount by extending the tenure.

Balance Transfer

Shift your loan to another lender offering lower interest rates.

Emergency Funds

If possible, use savings or investments to cover EMIs.

In some cases, a loan deferment may be reported to credit bureaus. This can affect your credit score, depending on the lender’s policies. However, it is still better than defaulting on EMIs, which can severely damage your credit history.

A loan deferment can be a helpful tool in managing financial difficulties, but it should be used wisely. If you are struggling with loan repayments, speak to your lender to understand the best option. Always consider the long-term impact on your interest and credit score before deciding.If you need a personal loan that suits your financial needs, explore the flexible options available at Aditya Birla Capital. The tailored loan solutions can help you manage your expenses effectively.Have you ever used a loan deferment ? Share your experiences or questions in the comments below!