My Creditor Offered to Defer My Payment—Should I Accept?
The short answer is there is no short answer. There are several points to consider, but first, an explanation of what the term defer means in the context of a loan agreement.
Bankers and other creditors are open to the possibility that borrowers may have the occasional financial problem. In order to use this to their best financial advantage, they created the deferral agreement. Typically, the fee associated with a deferral is equivalent to the interest that would have been earned during the period of the deferral. This means that the creditor will collect his interest income and defer the payment or payments to the end of the contract, pushing the maturity date out by the number of payments/months deferred. The deferral does not liberate you from the obligation of making those full payments at a later date.
Here are a few benefits derived from the deferral or extension as it is sometimes called.
- Deferrals are usually up for discussion when an account is past due. Accepting a deferral can return an account to a current state.
- If accepting a deferral brings the account contractually up-to-date, you will not take a hit on your credit report. If a delinquency was reported, the creditor should be asked to correct it. Ask this in writing, and keep a copy of your request along with the copy of the deferral agreement received from your creditor.
- Any late charge incurred must be reversed by the creditor if the deferral brings the account up-to-date.
- A deferral can give you some breathing room and get you through a rough patch without any damage to your credit score.
There are also these disadvantages to consider.
- Deferrals increase the overall cost of your credit transaction.
- A deferral effectively extends the term of your contractual agreement by the number of months/payments deferred—so your loan will take longer to pay off.
- If the loan is relatively new, the deferral fee is likely to be almost as much as your payment, which makes it a poor option.
- Most lenders limit the number of deferrals a borrower can be granted. Typically, a maximum of 1 per each year of the term. In other words, if you have a 5 year auto loan, you would be limited to 5 deferrals over the life of the loan. You might be granted a two month deferral, later a one month deferral, and down the road, another 2 month deferral. How these are parsed out vary by creditor and are usually the prerogative of the collector handling your account.
A deferral may seem like a great idea, and sometimes they are, but they can also be abused, by both the lender and the borrower. Using the deferral as a remedy for poor budgeting or overzealous spending is just going to cost you additional expense. Unscrupulous collectors will try to talk you into an extension or deferral for a variety of reasons. They may be trying to reach a goal, win a contest, avoid helping you to resolve the real problem, or they may just be taking the easy way out.
If it makes good financial sense to take a deferral, that’s fine. Just don’t allow yourself to be bullied or cajoled into accepting it as a solution unless it is the right choice for you.
TIP: Account representatives and collectors usually have some latitude with regard to fees. Occasionally, you can negotiate a lower than standard fee for your deferral. The fee for an extension is a policy, not a legal mandate. An experienced collector might cut you a break on the rate at which the deferral fee is calculated if you can offer a compelling reason. Extensions can also be forced upon you, unilaterally. Check the language in your loan agreement. Fees, however, cannot be forced, although costs will be incurred in the form of additional interest as a result of the extended maturity date.
If your credit score is at risk and a deferral will get you past the financial fork in the road, then it can be in your best interests to accept it as a solution. However, if your financial difficulties are going to be long term, you will be tossing good money after bad with a deferral. In the case of difficult financial circumstances that may persist for several months, other solutions need to be considered. Refinancing, consolidation, or, dare I say, bankruptcy may be better alternatives. This is the worst possible time to be wasting money on a hopeless cause.
Do you have any experiences with deferrals, extensions or similar creditor gimmicks that you would like to share with our readers? Did your account representative provide you with all the facts when you accepted a deferral?