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What you need to know before you defer your loan repayments during COVID-19

Putting your debt on hold might cost more than you expect.

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Many banks, credit unions and online lenders are offering deferment to help current and new customers afford financing during the coronavirus outbreak. While it might make your loan cheaper for the next few months, it will increase the total cost in most cases. But there are a few exceptions when deferment can offer short-term relief without the extra cost.

What is deferment?

Deferment allows you to pause repayments on a loan, usually for three to six months. When your loans are in deferment, you don’t have to pay anything — but interest will continue to accrue in most cases. Once deferment ends, your lender capitalizes interest or adds the accrued amount to your loan balance before your repayments resume. This makes your loan more expensive in the long run, since you’re paying interest on interest.

What’s the difference between deferment and forbearance

Both deferment and forbearance allow you to pause repayments, but forbearance is slightly more expensive.

With deferment, your lender tacks the skipped payments on to the end of your loan — extending you loan term. But with forbearance, you’re required to make all of those skipped payments up front or they’re added to your loan balance without extending your term.

This means you’ll get out of debt faster with forbearance, but could have significantly higher monthly repayments when they start up again.

What happens when I defer a loan during COVID-19?

More lenders than ever are offering deferment to help individuals and businesses survive the coronavirus outbreak. How it works varies depending on the type of loan, however.

Personal loan

Many personal loan providers including Fifth Third Bank, Key Bank and Regions Bank are offering standard deferment on current loans, usually for around three months. Some are also waiving interest during this period, though not all.

You can find a full list of banks that are offering deferment on personal loans with our guide to financial assistance during COVID-19.

Can I defer payments on new personal loans?

Yes — Gesa Credit Union, US Bank and several other lenders are also offering emergency loans to customers who lost income due to the outbreak. These typically come with deferred repayments, often with low or no interest.

Some lenders might not advertise these loans, so reach out to your local bank or credit union to ask what options are available to you. You can also check out our guide to finding a personal loan during COVID-19 for lenders to begin your hunt.

Business loans

Many business loan providers including Bank of America and Citizens Bank are offering standard deferment on their loans. In some cases, the lender might not charge interest during this time, though that’s not always the case.

The Small Business Administration (SBA) also started automatically covering principal, interest and fees on its most popular loan programs after the Coronavirus Aid, Relief and Economic Security (CARES) Act was passed in mid-March. And it’s encouraging SBA lenders to offer deferment and a one-year loan extension, too.

You can find a full list of lenders offering deferment and special business loans with our guide to COVID-19 financial assistance for small businesses.

Can I defer payments on new business loans?

Yes, the SBA is covering payments on new loans as well, as long as it’s part of an eligible program. It’s also offering six months of deferment on Paycheck Protection Program loans and one year of deferment on Economic Injury Disaster Loans (EIDLs), though interest will continue to accrue during that time.

State and local governments are also offering emergency loans, as well as a select few private lenders like US Bank, FundRocket and LiftFund. These often have deferred payments and no interest, typically for at least six months.

Car loans

Car loan providers like Ally Bank, Bank of America and Santander Bank are offering the same deferment options you’ll find on current personal and business loans: Deferment, with interest covered in some cases.

Can I defer payments on new car loans?

Many dealerships including Ford, Honda, Lexus and BMW are offering deferred payments on new car loans to move cars off the lot. Often, this comes with a 0% interest rate and other discounts like credits toward the sticker price.

Check out our guide to buying a car during COVID-19 to find a full list of car brands offering deals right now.

Student loans

The Department of Education has automatically deferred repayments on all federal student loans between March 13, 2020 and September 30, 2020. And it’s not charging any interest during this period.

Some private student loan providers including Ascent, Sallie Mae and College Ave. are also offering up to three months of forbearance, though they typically don’t waive interest.

You can find a full list of lenders offering forbearance with our guide to student loan assistance during the coronavirus.

Can I defer payments on new student loans?

New student loans already typically come with the option for deferment until six months after dropping below half-time enrollment. Interest adds up on private and most federal loans, with the exception of Direct Subsidized Loans.

Mortgages

Mortgage providers are also offering deferment and forbearance on home loans — typically for about three months, but usually without covering interest.

However, there’s one exception: The government is also deferring federally backed mortgages for 180 days and covering interest, under the CARES Act. After those days are up, you can apply for an additional six months of deferred payments with your lender.

Some lenders like Fannie Mae and Freddie Mac might also have deferment programs specific to landlords who are paying off multifamily homes, which are not covered by the CARES Act. But you might have to pay interest.

You can find a full list of deferment and forbearance options with our guide to COVID-19 mortgage assistance programs.

Can I defer payments on new mortgages?

Generally, home loan providers aren’t offering deferment or forbearance on new mortgages. Most mortgage relief is focused on current borrowers.

How much will deferment cost me?

If your lender isn’t charging interest during deferment, it won’t cost you anything. But if your lender is charging interest, follow these steps to calculate the cost of deferring your loan:

  1. Divide your annual percentage rate (APR) by 365 to get the the daily interest rate.
  2. Multiply your daily interest rate by your loan balance.
  3. Multiply the result from step 2 by the number of days your loan will be deferred.
  4. Add the result from step 3 to your loan balance, and add the deferment period to your loan term.
  5. Use the calculator below to calculate how much you’ll pay in interest each month and in total by deferring your loan.
  6. To compare it to the cost of your loan without deferment, enter your current loan details to see the difference.

Let’s take a look at an example …

Say you had a $10,000 loan with two years left on the term and an APR of 9%. Here’s how you’d calculate the cost of deferring it for 90 days:

  1. Divide 9 by 365 to get the daily interest rate — which is about 0.02%
  2. Multiply 0.02% by your loan balance of $10,000 — which is $2.
  3. Multiply $2 by 90 — the number of days your loan is deferred — to get $180.
  4. Add $180 to your loan balance to get $10,180 and extend your loan term by three months to get 2.25 years.
  5. In the calculator, enter $10,180 for the loan amount, 2.25 for the loan term and 9% for the interest rate.

Your new loan after deferment would cost you $417.91 per month and $1,103.49 in total interest. Without deferment, your loan would cost $456.85 per month and $964.34 in total interest.

This means deferring your loan will lower your monthly repayments by about $40, though you’ll pay around $140 more in interest over the life of your loan.

How do I qualify for deferment?

It depends on the lender, but deferment is generally available based on financial hardship. Each lender has different requirements, but under normal circumstances you need to show proof you lost your job or qualify for disability insurance.

During the coronavirus, many lenders have opened deferment up to all borrowers. And in the case of federally funded or federally backed programs, all loans might automatically be deferred.

How to defer payments on a loan

Each lender has its own process for deferment. During the coronavirus outbreak, the best way to get started is to log in to your online account and read about your options. Many have set up simple deferment applications that you can access after you log in without having to speak to a representative.

If you don’t have an online account or can’t figure out how to apply, reach out to your lender. Many customer service lines are busier than usual, so you might have better luck getting in touch through email or by using the live-chat feature on your lender’s website, if available.

You might have to submit a few forms verifying your financial situation, though some lenders have removed this step in order to process applications faster.

Keep making payments until you’re approved

Unless your accounts were automatically put in deferment, you have to continue to make repayments until your lender tells you you’ve been approved. Otherwise, your account will be considered delinquent. And if you miss enough repayments, you could default on the loan.

How does deferment affect my credit?

Deferring your loan during the coronavirus outbreak might have a positive effect on your credit, if anything. Lenders are generally reporting deferred accounts as current to credit bureaus. This extends your record of on-time payments and can ultimately boost your score.

However, since you aren’t actually paying down your debt, you might not see a significant improvement, if any. That’s because having more debt can lower your score.

If you stop making repayments before you get approved, however, it’ll damage your credit score.

And if you have federal student loans that are automatically being deferred, check your credit report ASAP for errors. Several borrowers noticed that their student loan servicer mistakenly reported their federal student loans as late. If you notice an error, reach out to both your servicer and the credit bureau to have it corrected.

How else can I stop or reduce repayments?

You can refinance your current loan for a lower rate or longer term to reduce the monthly cost. But if you’ve lost your job, that likely isn’t an option.

Instead, your best bet is to reach out to your lender and discuss your situation. Some may be willing to waive interest during deferment. Others might be willing to lengthen your term or reduce your rates to fit your new budget.

Many local governments and private organizations are also offering debt payment relief for borrowers who can’t afford to pay their loans. Reach out to a local aid organization in your area to explore options available where you live.

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Bottom line

Most banks, credit unions and online lenders are offering some sort of deferment or financial assistance to customers. Even if yours hasn’t advertised anything, reach out to customer service to discuss your options — they might be offering help on a case-by-case basis. You can stay up to date on the latest news surrounding the coronavirus and what it means for your finances with our guide.

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