Here’s How a Deferred Payment Agreement Works

What is a deferred payment plan?

A deferred payment plan is a flexible payment option or agreement between a lender and a borrower where the borrower pushes their payments back to a later date. This arrangement is often made when the borrower can’t pay immediately but the lender is willing to make accommodations. The borrower can continue to use whatever they are borrowing, but they may have to start paying interest on it. There are many types of payment deferral plans as well. They can be found anywhere from tuition to your local stores. Let's jump right into a few of them. They can be found anywhere from tuition to your local stores. Let’s jump right into a few of them. 

Types of Deferred Payment Plans 

Tuition / Education

It’s no secret that tuition can be extremely expensive and difficult to pay. The steep cost of tuition is a large reason why there is $1.5 trillion in student loan debt. Students and their families are expected to pull tens of thousands of dollars out of thin air to pay for their tuition. Is this an easy task for every family? Of course not. Universities understand that not all of their students can afford to pay their full tuition when it is due. To ease some of the strain of paying tuition, some universities offer deferred automatic payment plans for their students.

Instead of forcing their students to withdraw from the school, universities might allow their students to defer their tuition payments to a later date or split the cost into smaller pieces. For example, instead of paying the full $60,000 of tuition when it's due, a university’s deferred payment plan might let a student push the due date further down the road. The deferred payment plan also might let that student pay the tuition in four payments of $15,000 that are much more manageable. 

For the most part, universities value their students and want to keep them at school if they can. If you are struggling with your tuition, ask about a payment deferral option with your school.

Goods and Services

Have you ever needed something expensive from a store but don’t have the money to buy it? News flash: if you’ve been in this situation before, you are not alone. Most people don’t have the spare cash to pay out of pocket for expensive furniture or a computer you need for work. Some places just want to ensure the sales of their products and are fine with letting you pay for the item or service in the future if it means you’ll buy it from them. 

Think of a deferred payment plan with a store almost as a layaway. When you get a layaway on an item, the store reserves the item for you until you have paid the full price for the item. However, with a deferred payment plan the company will give you the item before you’ve paid the full price. For example, if you purchase an expensive T.V. from an electronics store with a deferred payment plan, the store will give you the T.V. and for a few months you will only need to pay interest on it. After a few months, you will stop paying interest and begin to pay the full amount of the computer in whatever plan you and the store agreed upon. These payment plans help companies attract customers as well as making payments easier for their customers. 

Loans

When a borrower defaults on their loan, the institution lending the money loses all the money they weren't paid back. To avoid this, your lender or financial institution might make accommodations for their borrowers to make their repayment easier. Today, many institutions are making these accommodations to their customers to ease some of the financial hardship from Covid-19. One such accommodation is deferred payment plans on loans. These can allow the borrower to freeze payments for some time and add them on to the end of the last payment. For example, if you are making monthly payments on your loan that extend until December, you could defer one month of payment and your repayment plan period would then end in January.

What’s the catch here? While some companies offer plans that don’t charge interest on the months you’ve deferred, others do. If you are repaying your loan over 12 months and you defer 2 months of payment, you are now paying 14 months of interest instead of 12. If you are seeking a deferred payment plan with your lender, be sure it is clear how you are being charged interest. 

Investments

Deferred payment plans can be found in the investment industry, but they can be tricky to understand. Let’s break it down into more simple terms. 

With investments (stocks, bonds, etc.), the buyer or the seller of the investment may be able to negotiate a deferred payment contract. For someone buying an investment, they can receive the investment and not have to pay the full price until the contract “expires.” The seller can charge the buyer interest until the contract expires. Once it expires, the buyer must pay the full price of the investment.

Individual retirement accounts or “IRAs” are another form of deferred payments. The money you invest in your IRA is your income that has already been taxed. If you want to withdraw money from your IRA before you are 59 ½, you will get taxed. However, if you wait or “defer” your withdrawal (the payment to you) until after you are 59 ½, you will not be taxed. Thus, IRA’s are deferred payment plans.  

Loans vs. Deferred Payments

Loans and deferred payments are two separate financial vehicles to gain access to cash, products, or services, but they function quite differently. 

Loans have traditionally been the more popular financial vehicle, but deferred payment options is a growing niche that has become mainstream. The biggest difference is that deferred payment options often have no interest attached, whereas loans will always have interest. 

Loans are typically generated from banks and credit unions that require the interest payments to make a profit, while deferred payments have become a popular financial vehicle that businesses use to sell goods or products. 

Currently, many of the top ecommerce websites in the world offer deferred payment options to acquire goods or services now and pay later. Online shoppers are becoming warier about charging everything to high interest credit cards, and deferred payments provide a more accessible alternative financial vehicle to say yes.

Pros and Cons of Deferred Payment Plans

These deferred payment plans are pretty good, right? Well, yes and no. Deferring your payments can be a viable option if you foresee yourself not being able to pay your loan payment right away. However, nothing is perfect and these plans are no different. Let’s look at some pros and cons of these deferred payment plans. 

Pros

There are many aspects of a deferred monthly payment plan that is beneficial to the borrower. Most of all, these plans can help you catch your breath if you are overwhelmed with your repayments. Unexpected expenses can come at any time and you might need to put your loan payments on pause to pay for more important things like your rent and food. This way, you can push your repayments until later without many consequences. 

If you negotiate with your lender to defer your repayments, you are technically not breaking the original contract for the loan. Therefore, your lender is not supposed to report late payments to credit bureaus like they would if you had not made a deferred payment plan. If you deferred your loan by one month and you don’t make payments during that month, you shouldn’t be charged late fees. 

Deferred payment plans are a very smart and useful alternative to paying late or outright defaulting on your loan. They can provide you some relief from the stress of repaying your loans without too many downsides. 

Cons

While deferred payment plans are helpful, you are likely going to end up paying more than you would have if you paid on time. Again, while some companies aren't charging interest on the deferral period during the Covid-19 crisis, some companies still are and most companies will continue to once the crisis is over. You could end up paying a few more interest payments than you originally planned on. Paying this interest may end up not costing that much, but there’s a chance that it can make your loan too expensive. 

All deferred payment plans are not the same and some are not as forgiving as others. Instead of extending your payment schedule by however long you are deferring, the lender might keep your end date the same and make the final payment very large. For example, if your repayments are $1,000 a month and you defer the loan for two months, your final payment might be your last payment plus the two you skipped, totalling $3,000. Ouch is right. Paying the $1,000 a month might end up being easier than making a deferred payment plan where you have to pay $3,000 in the last month. Make sure you clarify this with your lender before you make a deferred payment plan. 

Does a Deferred Payment Plan Affect my Credit Score?

Getting a deferred payment plan shouldn’t affect your credit score. If your lender agrees to give you one, any payments you don’t make in the deferral period won’t be reported as late payments. While your lender will likely report your deferral to a credit bureau, it should not have any effect on your score. 

Keep in mind that you can’t stop making payments until your lender agrees to give you a deferred payment plan. Even if they agree after the fact, If you miss a payment before an agreement is reached your lender will likely report a late payment and will charge you a late fee. This will impact your credit score. Also, you can't use a deferred payment plan to erase any late payments you made before the plan was agreed. If you have a few missed payments before your deferred payment plan, you will still have to pay late fees and your credit score could drop.

How to Negotiate a Deferred Payment Plan

While it varies between what you borrow, getting a deferred payment plan with your lender is not too painful. For the most part, all you do is contact your lender and discuss the possibility of deferring your payments. If you have a credit counselor, they may be able to negotiate on your behalf as well. Getting a deferral plan for a loan versus tuition might look different, but the idea is the same - contact your lender and get permission. Before you start deferring your own payments, you need to make sure your lender has officially agreed or else you might accidentally be late on your payments. 

You will most likely need to give your lender ample warning about your desire to defer payments. If you have a payment due in one day and you ask for a deferred payment, chances are your lender declines. Make sure you alert your lender many days in advance and be able to say why you need a deferred payment plan. 

Also, keep in mind that your lender may have some provisions in the contract that you need to be aware of. For example, your lender may only give you so many times you can defer your payments. You should be aware of any of these before you get a deferred payment plan. 

Alternatives to Deferred Payment Plans

When looking for a deferred payment plan, there is a chance your request gets denied or you have already had too many of them. Whatever the case, there are other solutions if you are struggling with your loan payments. 

Even if you couldn’t get a deferment plan, you may still be able to negotiate with your lender. Instead of deferring your payments, your lender might lower your interest or monthly payment on the loan. You could also ask to restructure your loan with the lender. With this, you could change the terms of your loan entirely and pay lower monthly payments or interest over a longer period of time. Doing so could give you the breathing room you were looking for with a deferred payment plan. You may need decent credit to do this, however. 

What if your is lender unwilling to negotiate your loan contract with you because of your bad credit? An installment loan at Possible could be your answer. You don’t need good credit to get a DPP installment payment plan and you can get your money fast right on the app. The loan is repaid over two months and can be a way to build up your credit score in the process. If you’re struggling to make your minimum payment, you can request to move your payments back right in the app.

Final Verdict

If you can get one, a deferred payment plan is a much better alternative to late payments and mandatory fees, defaulting, or overdrafting your bank account. This payment method allows you some breathing room when paying your loans back and at no expense to your credit score. They are not too difficult to come by and they can be beneficial to both you and your lender. While additional interest or inflated final payments could pose difficulties, the positive benefits of a deferred payment plan outweigh the negatives.