Will deferring a loan payment tank my credit score?

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How Does Deferring a Loan Affect My Credit Score?

An unexpected layoff or a job loss could make keeping up with debt payments more challenging. When your budget is stretched thin, having the option to pause payments on credit cards, car loans, or other debts may be appealing.

Taking a break from financial obligations temporarily can offer some financial breathing room, but it’s important to understand how deferred payments may affect your credit score. (Please note: SoFi is not a credit repair company.)

Does Deferring a Payment Hurt Credit?

Here’s the good news: deferring loan payments does not directly affect your credit scores. In fact, if you’re having trouble making payments, it can be a good idea to defer your loans until you get your feet on solid financial footing. Lenders will report that they’ve paused payments to the credit bureaus, and this will appear on your credit report, but it will not hurt your score.

That said, deferring your loans can have other impacts on your personal finance. For example, depending on the type of loan, it may continue to accrue interest while it’s deferred. That means you’ll end up paying more money in the long run. However, if deferring your loans means you will avoid default, paying late fees, and hurting your credit score, the extra interest may still be worth it.

How Deferring Loan Payments Works

If you’re having trouble making payments on a loan, you can ask your lender if it’s possible to defer them. If they agree, you can temporarily stop making payments on your loan, avoiding late payment fees. Also, your lender will not report missed payments to the credit reporting bureaus.

You’ll need to apply for deferment directly with your loan provider. If you have federal student loans, you’ll apply with your loan servicer. Similarly if you are interested in deferring your auto loan or mortgage, contact your lender directly. Auto lenders may refer to deferment as loan extension or postponement.

Forbearance vs. Deferring Loan Payments

The difference between forbearance vs deferment can be tricky to parse. For mortgages, forbearance is the pausing of a loan during which interest accrues, while deferment is the option to tack on paused payments to the end of the loan. The terms are also often used to describe options for pausing debt on student loans. Here’s a look at the differences between the two terms in this case.

Forbearance vs. Deferring Loan Payments

Which Loan Payments Can Be Deferred?

It’s possible that a wide range of loans can be deferred, from federal student loans to home mortgage loans. Additionally, because Covid-19 affected so many Americans financially, the government has introduced measures to provide some relief from certain debt payments.

In addition, many lenders, credit card issuers, and utility service providers have also taken the initiative to offer programs allowing customers to pause payments.

Depending on each individual situation, U.S. residents may be able to get relief (federal or otherwise) from paying these expenses temporarily:

  • Rent
  • Mortgage
  • Federal student loans
  • Private student loans
  • Credit cards
  • Utility services, including water, electric, and gas
  • Car loans
  • Personal loans

Will I Be Charged Interest During Deferment?

You will likely be charged interest during loan deferment, with some exceptions. For example, if you defer a subsidized federal student loan, the government may make interest payments for you. Otherwise, with other loan programs, you’ll be on the hook for any interest that accrues during the deferment period.

How you pay interest will likely vary by lender. For example, some lenders may only apply interest rates to your principal, and won’t charge you interest on the interest you accrue. Interest payments may be tacked on to the end of your loan, or they may make your monthly payments larger. They may also be added to your principal amount once your payments restart. In all of these cases, you’ll end up paying more over the life of the loan.

Federal Programs That Allow Deferred Payments

For those who own or rent homes or have student loan debt, the federal government offered relief options in response to the Covid-19 pandemic.

Covid-19 Mortgage Forbearance

First, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act  ) allows eligible homeowners to pause making mortgage payments  for up to 180 days. An additional 180-day extension can be requested if homeowners need to pause payments a little longer.

This relief applies to eligible homeowners who have federally backed mortgages, including:

  • Loans owned by Fannie Mae and Freddie Mac
  • FHA loans
  • VA loans
  • USDA loans

During the 180-day period, eligible homeowners can’t be charged any fees, penalties, or additional interest (on top of what’s already scheduled for payment), and late payments can’t be reported to the credit bureaus.

It’s important to note that this is a mortgage forbearance program, not mortgage forgiveness. That means payments that are missed will need to be made up.

Depending on the lender, loan terms may be modified, the missed payments could be added onto the end of the home loan, or a lump sum payment may be required.

Borrowers with a mortgage backed by HUD/FHA, USDA, or VA may make an initial Covid-reated request for forbearance as long as the Covid-19 National Emergency is in effect. There is currently no initial forbearance request deadline for loans backed by Fannie Mae or Freddie Mac.

Deferred Payments for Federal Student Loans

The CARES Act also extends a forbearance period automatically for eligible federal student loan
borrowers  
. Previously, qualified students could defer student loan payments through deferment or forbearance due to hardship or other factors, but there are some changes due to the CARES Act.

Now, those with an eligible federal student loan are not required to make student loan payments through Aug. 31, 2022. The interest rate for federal student loans is set to 0% during this time, and any payments made would be applied only to loan principal.

Deferred payments still count toward required payments for Public Service Loan Forgiveness (PSLF) for those still employed full time, regardless of whether they pay anything toward their loans. Since payments are being suspended automatically, credit score won’t be affected.

Note that once the automatic forbearance ends, payments would become due again. Borrowers would need to reach out to their lenders if they wish to continue forbearance or take a deferment instead.

As of this writing, Direct Loan borrowers or Federal Family Education Loan Program borrowers who stop paying their student loans altogether after the forbearance period is over could end up in default once payments are 270 days late. Borrowers in the Federal Perkins Loan Program are considered in default if their payment is not made by the scheduled due date.

Federal Relief for Renters

If a U.S. resident is renting a home versus owning one, they may be able to temporarily stop making rent payments without risking eviction.

Most of the federal protections for renters under the CARES Act have expired, but some states still have eviction protections in place, with varying expiration dates. There may also be state or local rent and utility assistance available for those who meet eligibility requirements.

Deferring Payments Outside of Federal Relief

Federal forbearance programs can help provide a break from certain payments, but they don’t offer blanket coverage to everyone. For those negotiating deferred payments outside of these programs, it’s important to keep one’s credit score in sight.

Pausing Mortgage and Rent Payments

If a mortgage or rental property isn’t covered by the CARES Act, borrowers could still reach out to their lender to discuss what options, if any, may be available for putting payments on hold.

Those options might include:

  • Loan modification
  • Forbearance
  • Mortgage refinancing

Modifying a loan or requesting a forbearance could help protect a credit score if the borrower hasn’t fallen behind on the payments. But any late or missed mortgage payments would still be included on their credit report.

On the renting side, the CARES Act temporarily prohibited adverse credit reporting for rent in cases where the landlord has agreed to forbearance, as long as payments weren’t already delinquent.

But if a tenant and their landlord don’t have an agreement in place and the tenant isn’t covered by federal forbearance, it’s possible that late or missed rent payments could be reported to the credit bureaus.

Deferring Payments on Private Student Loans

Private student loans aren’t covered by the CARES Act. It’s up to individual lenders to decide what options, if any, they’ll offer to allow borrowers to ease payment burdens during this time.

That might include:

  • Deferment
  • Forbearance
  • Student loan refinancing

Similar to a traditional student loan forbearance  for federal student loans, private student loan forbearance wouldn’t affect the borrower’s credit score. Not all private lenders offer forbearance on private student loans, so a borrower would need to check with their loan servicer.

If a private student loan lender doesn’t offer forbearance as an option, the borrower may want to look into refinancing their private student loans online. SoFi can work with private student loan borrowers to come up with possible options.

Student loan refinancing allows borrowers to pay off an existing loan with a new loan, ideally at a more competitive interest rate. Refinancing could also help lower monthly payments, making loans more manageable for a specific budget.

However, since the CARES Act has suspended all payments for federal student loans, and made all interest on them 0% through May 1, 2022, it might be a good idea to wait out that period before making any decisions on the refinancing or forbearance.

Putting Utility Payments on Hold

If someone is unable to pay their electric, water, or other utility bills, they may be able to work with their service providers to defer those payments.

While many utility companies suspended disconnects during Covid-19 and were allowing customers to make those payments up at a later date, some utility moratoriums have ended.

Generally, utility service payments (or non-payments) aren’t reported to a person’s credit unless their account is sold to a debt collector after default.

If you are struggling to make utility payments, it might be a good idea to work out a payment plan with the utility company. Additionally, some states have relief programs  for qualifying individuals and families who are struggling to make utility payments.

Deferring Credit Card Payments and Other Loans

For those with credit cards, car loans, or personal loans making sure to stay on top of those payments can be critical to a credit score. Remember, payment history accounts for 35% of a FICO Score  .

Pausing Credit Card Payments

Worried about falling behind on credit card payments? Credit card companies may be able to help.

Many credit card issuers offer hardship programs for customers who are having trouble making payments. Depending on the terms of the card issuer’s program, cardholders may be able to:

  • Reduce the card’s annual percentage rate (APR) temporarily
  • Reduce the minimum monthly payment due
  • Waive late fees and other penalties
  • Pause payments temporarily

Cardholders could call their credit card company to find out what hardship options might be available. When negotiating deferred payments for credit cards or any other type of debt, they might want to be prepared to explain why they can’t pay and the nature of their hardship.

If the cardholder is able to get enrolled in a hardship program, understanding the terms of the program is important. If they’re expected to make a payment, for example, even if it’s a nominal one, it’s still important to pay on time to avoid a negative mark on their credit history.

Pausing Loan Payments

If a borrower owes money on a car loan or personal loan, they could reach out to their lenders to see whether a forbearance is possible.

For instance, an auto loan lender might offer a skip-a-payment program. Instead of making a regular payment, they might let a borrower skip it and have it added on to the end of their loan term.

Personal loan lenders may offer similar options or allow borrowers to reduce their monthly loan payments temporarily for those who qualify. Checking with the individual lender to inquire about options is recommended.

Loan Deferment Alternatives

There may be certain situations in which you don’t want to put your loan into deferment or you aren’t able to. For example, perhaps you’ve reached the maximum number of times you can defer a loan, or your request to do so is denied for some other reason. If this is the case, you may want to consider other options.

Your lender may be able to offer some alternatives. For example, they might be able to temporarily lower your interest rate or monthly payment. They might also be able to modify your loan agreement to lower your monthly payments.

Finally, you might consider refinancing your loan. When refinancing, you take out a new loan — ideally with a lower interest rate or better terms — and use it to pay off the old loan.

Staying on Top of Credit Scores During a Crisis

Credit scores are an important part of financial life, and preserving yours during a crisis like the Covid-19 outbreak may be a top priority. Using deferment and forbearance periods to pause payments could help protect a credit score.

However, bear in mind that while a credit score itself may not change, a forbearance can still appear on a credit report and could affect future lending decisions.

The three main credit reporting agencies, Equifax, Experian, and TransUnion will continue providing weekly free credit reports  through April 2022. This is an extension of the program, which was announced in April 2020, at the start of the COVID-19 pandemic.

The Takeaway

The Covid-19 pandemic has caused unprecedented financial stress for millions of Americans. For those facing uncertainty, there are a number of different relief programs designed to provide temporary relief. Current programs can help borrowers defer their federal student loan payments, and some borrowers may be eligible to pause mortgage payments. Those struggling to make payments can consider talking to their lender to see what types of plans are available.

Learn More:

This article originally appeared on Sofi.com and was syndicated by MediaFeed.org.


Please understand that this information provided is general in nature and shouldn’t be construed as a recommendation or solicitation of any products offered by SoFi’s affiliates and subsidiaries. In addition, this information is by no means meant to provide investment or financial advice, nor is it intended to serve as the basis for any investment decision or recommendation to buy or sell any asset. Keep in mind that investing involves risk, and past performance of an asset never guarantees future results or returns. It’s important for investors to consider their specific financial needs, goals, and risk profile before making an investment decision.

The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. These links are provided for informational purposes and should not be viewed as an endorsement. No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this content.
Communication of SoFi Wealth LLC an SEC Registered Investment Advisor
SoFi isn’t recommending and is not affiliated with the brands or companies displayed. Brands displayed neither endorse or sponsor this article. Third party trademarks and service marks referenced are property of their respective owners.

Communication of SoFi Wealth LLC an SEC Registered Investment Adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at www.adviserinfo.sec.gov. Liz Young is a Registered Representative of SoFi Securities and Investment Advisor Representative of SoFi Wealth. Her ADV 2B is available at www.sofi.com/legal/adv.

There are so many personal loan options! How do I chose the best one?

A personal loan is a type of loan offered by many banks, credit unions, and online lenders. Unlike a mortgage loan or car loan, which specifies what the money should be spent on, a personal loan doesn’t have as many restrictions. Typically, you can use the funds from a personal loan to pay for a wide range of expenses.

Various factors will influence which type of personal loan is right for you, like how much money you plan to borrow, your credit and income, and how much debt you already have. To make the best selection for your unique needs, however, it’s important to understand the different types of personal loans there are.

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A common type of personal loan is an unsecured personal loan. This means there’s no collateral backing up the loan, which can make them riskier for lenders. Approval and interest rates for unsecured personal loans are generally based on a person’s income and credit score, but other factors may apply.

Unlike an unsecured loan, there is some sort of collateral backing up a secured personal loan. For example, think of a home mortgage — if the borrower does not make payments, the bank or lender can seize the asset (in this case, the home) that was used to secure the loan.

Since secured loans involve collateral, lenders often view them as less risky than their unsecured counterparts. This can mean that secured personal loans might offer a lower interest rate than a comparable unsecured loan.

Here’s a comparison of some of the features of unsecured and secured personal loans:

unsecured and secured personal loans

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A personal loan with a fixed interest rate will have the same interest rate for the life of the loan. This also means you’ll have the same fixed payment each month and, based on your scheduled payments, can know upfront how much interest you’ll pay over the life of the loan.

On the other hand, the interest rate on a variable rate loan may change over the life of the loan, fluctuating based on the prevailing short-term interest rates. Typically, the starting interest rate on a variable rate loan will be lower than on a fixed rate loan, but the interest rate is likely to change as time passes. Variable rate loans are generally tied to well-known indexes.

If you’re trying to decide on a variable or fixed-rate personal loan, this summary might be helpful (you might also consider crunching the numbers using a personal loan calculator):

Variable or Fixed Interest Rate

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This type of personal loan refinances existing debts into one new loan. Ideally, the interest rate on this new debt consolidation loan would be lower than the interest rate on the outstanding debt. This would allow you to spend less in interest over the life of the loan.

With a debt consolidation loan, you may only have to manage one single monthly payment. This streamlining of monthly debt payments is another major perk of this type of loan.

Andrii Dodonov/istockphoto

If you’re struggling to get approved for a personal loan on your own, there are circumstances in which you can apply for a loan with a cosigner. A cosigner is someone who helps you qualify for the loan but does not have ownership over the loan. In the event that you are unable to make payments on the loan, your cosigner would be responsible.

Co-borrowers and co-applicants are other terms you might hear if you’re interested in borrowing a personal loan with the assistance of a friend or family member. A co-borrower essentially takes out the loan with you. Unlike a cosigner, your co-borrower’s name will also be on the loan, so they’d be equally responsible for making sure payments are made on time.

Meanwhile, a co-applicant is the person applying for a loan with you. When the loan application is approved, the co-applicant becomes the co-borrower.

VioletaStoimenova/istockphoto

Slightly different from a personal loan, a personal line of credit functions similarly to a credit card. It’s revolving credit, which typically means there is a maximum credit limit, a required monthly minimum payment, and when the debt is paid off, money can be withdrawn again.

The funds in a personal line of credit are generally accessed by writing checks or using a card, or by making transfers into another account.

Interest rates on a personal line of credit may be lower than the interest rates on a credit card. Like personal loans, there are both unsecured and secured personal lines of credit.

payphoto/istockphoto

Some credit cards offer the option to borrow cash against the card’s total cash advance limit. This is called a credit card cash advance. The available cash advance amount may be different than the total available credit for purchases — that information is typically included on each credit card statement.

Depending on the credit card company’s policy, there are a few ways to secure a cash advance: you can use your credit card at an ATM to withdraw money, borrow a cash advance from a credit union or bank, or request a cash advance from the credit card company directly.

Cash advances typically have some of the highest rates around. There are often additional credit card fees associated with a cash advance transaction. Check your credit card disclosure terms for full details before taking a cash advance.

PKpix/istockphoto

The common uses for personal loans are wide-ranging. Here are some of the reasons why people consider borrowing money with a personal loan.

Planning a Wedding

The dress, flowers, catering, photographer, venue fees — the list of wedding expenses can go on and on. A personal loan for weddings is one option that you can use to cover all or part of costs. Just keep in mind that this will involve going into debt, and you will pay interest.

michael1959/istockphoto

Whether you’re moving across the country or just across town, the cost of moving can add up quickly. A personal loan could potentially help you make ends meet as you’re relocating.

And if you want to do a few renovations or upgrades on your new place once you’re moved in, a personal loan could help with that too.

Dean Mitchell/istockphoto

Another reason people use personal loans is to consolidate debt. Debt consolidation could allow you to simplify your repayment since you may have just one payment to keep track of every month after consolidating.

Depending on the rate and terms you qualify for, consolidating your debt could potentially help you save money on interest payments while you pay down your debt.

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Planning a vacation? Maybe your niece is getting married in Greece or you and your partner are planning a honeymoon. If budgeting and saving aren’t enough to get you to your vacation goal, a vacation loan could be one option to help you fill in the gaps. Just make sure you’re not taking on debt that you won’t later be able to pay back.

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Whether it’s a new furnace, new patio furniture, or an engagement ring, if the cost of your dream item is a little out of your budget, a personal loan could help you afford the option you really want.

KatarzynaBialasiewicz/istockphoto

Armed with some knowledge about types of personal loans, you may be ready to make an educated decision about whether or not a personal loan is right for you.

Learn More:

This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.


Please understand that this information provided is general in nature and shouldn’t be construed as a recommendation or solicitation of any products offered by SoFi’s affiliates and subsidiaries. In addition, this information is by no means meant to provide investment or financial advice, nor is it intended to serve as the basis for any investment decision or recommendation to buy or sell any asset. Keep in mind that investing involves risk, and past performance of an asset never guarantees future results or returns. It’s important for investors to consider their specific financial needs, goals, and risk profile before making an investment decision.

The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. These links are provided for informational purposes and should not be viewed as an endorsement. No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this content.
Communication of SoFi Wealth LLC an SEC Registered Investment Advisor
SoFi isn’t recommending and is not affiliated with the brands or companies displayed. Brands displayed neither endorse or sponsor this article. Third party trademarks and service marks referenced are property of their respective owners.

Communication of SoFi Wealth LLC an SEC Registered Investment Adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at www.adviserinfo.sec.gov. Liz Young is a Registered Representative of SoFi Securities and Investment Advisor Representative of SoFi Wealth. Her ADV 2B is available at www.sofi.com/legal/adv.

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Featured Image Credit: tolgart/istockphoto.

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