If you are struggling to keep up with payments on a loan, you have a few options. One option is to simply stop paying, which usually results in dire consequences. A better option is to ask your lender to defer the loan for a set period of time, which, if the lender agrees, will not negatively impact your credit history or score.
Deferring a Loan
When you fall behind on a loan, your first impulse may be to avoid contact with your lender. However, it may be in both the lender's and your interest to work out a deferment, especially if you expect your financial hardship to be temporary. Federal student loans specifically allow for deferments if you are in school or have a graduate fellowship as well as if you are unemployed or facing financial hardships. The lender who manages your car loan may let you defer a payment if you are struggling but will be able to continue to make payments once you get over a rough patch. Your mortgage lender may work with you to develop a deferment and repayment plan rather than let your home go into foreclosure.
Defaulting vs Deferment
If you stop making loan payments outside of a special arrangement with your lender, you will be considered in default. Defaulting on a loan hurts your credit score, as those missed payments show up on your credit history. More than simply damaging your credit, defaulting can result in you losing your home if you fail to pay your mortgage. A lender can repossess your car if you don't pay your car loan. When you default on a student loan, the government can take payments from your paycheck as well as your tax returns and has the right to sue you.
Deferring a payment does not mean you never have to pay it. When you defer a student loan, you are still responsible for the entire principal of the loan at the end of the deferment, plus any interest that accrued during the deferment. Usually, the interest is added to the principal of the loan, increasing the amount you owe. In the case of car payments, you may only get a 30-day deferment, meaning you will need to make the payment at the end of the month. If you defer mortgage payments, you'll have to pay extra once you resume payments to get the loan back on track. Some lenders expect you to make a lump sum payment of the deferred amount, according to Steve McLinden, real estate advisor at Bankrate.com.
You must contact your lender to get a deferment, otherwise it looks like default and harms your credit. To defer a student loan, you'll need to complete a form for the relevant deferment reason and provide proof that you are eligible for the deferment. If you would like to defer a car or mortgage payment, you need to contact your lender and explain your situation. Keep in mind that your lender does not need to grant you a deferment. When you request a deferment or forbearance on a mortgage or car loan, ask for everything in writing, including the repayment terms and the length of the deferment.
- Consumers Union; How to Talk to Your Lender if You Can't Pay Your Mortgage, Car Loan or Credit Card Due to the Hurricane; Gail Hillebrand
- Edmunds; What To Do If You Can't Make Your Car Payment; 2009
- Bankrate; Try Forbearance to Fix Late Mortgage; Steve McLinden; 2010
- Student Aid; Repayment Options: Default
- Comstock/Comstock/Getty Images