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Struggling to make ends meet is a feeling all too familiar to many of us. The stack of bills piling up, the constant worry about how to cover the next payment - it can be downright overwhelming. That's when the option of deferred payments starts to look tempting, doesn't it?
I remember the time my car unexpectedly broke down, and I was staring at a repair bill I simply couldn't afford right then. The mechanic mentioned I could defer the payment, and in that moment of desperation, it sounded like the perfect solution. But as I later discovered, deferred payments aren't always the saving grace they appear to be.
While negotiating a formal agreement to delay an upcoming payment or get an item without having to pay for it immediately can provide temporary relief, there are important factors to consider before signing on the dotted line.
Key Takeaways
In the finance and credit industries, the term "deferred" means to "put off", "postpone", or "delay" a payment that would otherwise be due.
Deferred payments are formal agreements that allow you to push back your next payment. There can be a wide range of reasons why a client would choose to apply for a deferred payment (in case the financial institution offers such an option) with the most common one being temporary financial hardship.
Today, many purchases have a deferred payment option, not just loans. In some cases, you would be allowed to purchase an item, start using it immediately, and pay it off later.
You would still be required to make all the necessary payments, but with deferred payments, you’ll get a few weeks or even months to make payments.
If you’d like to take advantage of deferred payments, follow this step-by-step guide:
One of the most familiar examples of deferred payments is the zero-interest credit card. When you sign up for a credit card with a promotional 0% APR period, the credit card issuer is essentially deferring the interest charges you would normally pay.
Let's say you make a $1,000 purchase on a new credit card with 12 months of 0% interest. Instead of having to pay the full $1,000 upfront, the card issuer allows you to pay it off in monthly installments over that year. They're deferring the interest that would typically accrue on the balance.
Of course, the credit card company doesn't offer this out of the goodness of their heart. They're hoping that during those 12 months, you'll get accustomed to using their card and continue using it after the promotional rate expires. At that point, they can start charging you the regular interest rate on any remaining balance.
Another common example of deferred payments is the layaway plan. With layaway, you can select an item at a store and pay for it in installments over time, rather than having to pay the full price upfront. The store effectively defers your final payment until you've completed all the scheduled payments.
The benefit for the consumer is being able to secure the item and pay for it gradually. But the retailer also benefits, as the layaway plan encourages customers to follow through on their purchase and provides the store with a steady stream of cash flow as you make each installment.
Deferred payments can be a double-edged sword – providing temporary relief but potentially leading to long-term financial challenges if not managed carefully. Let's explore two common examples of deferred payment agreements and the nuances you must understand.
Taking out student loans is a reality for many aspiring scholars, and deferment can be a valuable option in times of financial hardship. When you defer your student loan payments, you're essentially putting off the obligation to make those monthly payments for a set period.
This can be especially helpful if you're facing unemployment, economic difficulties, or even going back to school. During the deferment period, interest may still accrue on the loan, meaning the overall balance could grow. But it provides temporary relief from the burden of those regular payments.
The key is to understand the terms of the deferment – how long it lasts, whether interest will continue to accumulate, and what's required to qualify. Mismanaging a student loan deferment can lead to snowballing debt, so it's crucial to have a plan in place for when the deferment period ends.
The rise of "buy now, pay later" (BNPL) services has made deferred payments increasingly accessible for everyday consumer purchases. These plans allow you to split the cost of an item into smaller, interest-free installments, often with the first payment due at the time of purchase.
On the surface, BNPL can seem like a convenient way to manage cash flow and access products without having to pay the full amount upfront. However, the deferred nature of these payments can also lead to overspending and missed payments, which can incur fees and damage your credit.
It's important to read the fine print, understand the specific terms of the BNPL agreement, and ensure you have a plan to make those scheduled payments on time. Otherwise, the temporary relief of "buy now, pay later" could turn into a long-term financial headache.
Whether you're navigating student loan deferment or exploring a BNPL option, the key is to approach deferred payments with caution and a clear understanding of the potential consequences. Weigh the short-term benefits against the long-term impacts, and make sure any deferred payment plan aligns with your overall financial goals and budget.
For this financial product, let's use an example to better understand how this may work in real life.
Sebastian and Maria started earning less at their job due to the financial crisis. During this time, their son also started college, so naturally, the couple wasn’t able to make their mortgage payments.
The bank agreed to not foreclose on their house and postpone the payments for 6 months. The interest continued to grow during this time.
To reduce the impact of financial strain, the bank offered the couple to start making the payments at 80% of the initial monthly payment after the 6 months pass (in another 6 months, the monthly amount will get raised back to the initial mortgage).
Deferment is relatively common in a variety of industries. Here are just a few examples:
The main reason why plenty of farmers decide to take advantage of deferred payments is because their earnings are highly seasonal. Deferred payment agreements help those in the agricultural industry pay their taxes and take care of the employee' salaries even if their produce is not in season at the moment.
A student loan deferment allows qualified applicants to reduce or stop making payments on the loan altogether for up to 3 years.
In the case of a federally subsidized loan, no interest accrues as the government takes care of the interest payments. In all other instances, the interest money will continue to grow. Most famously, the government deferred payment for borrowers during the COVID-19 pandemic for more than three full years.
In real estate, a deferred payment can be used to get access to a no-interest loan. The property acts as collateral in such a case, and once the house sells the borrower must pay off the loan in full.
Such schemes are especially popular in areas with older homes. Instead of moving out, the owner of the house takes out a loan and uses the money to restore the building. Once the borrower passes away, the money gets returned to the lender upon the sale of the house.
Payments plans are used across plenty of industries to drive sales and attract new customers.
Some businesses would offer a ‘free’ period during which you don’t need to pay anything followed by a regular payment schedule. Other companies might offer deferred payments as a complimentary service for a few months, but after that, you would have to switch to regular payment obligations.
In any case, make sure to read the fine print before signing any documents.
It might be easy to mix up these terms as both forbearance and determents allow the customer to postpone the payments. But there are a few important differences that you should be aware of.
Perhaps, the most important thing about loan deferments is that no interest will accumulate during the delay.
So, after the time is up, the borrowers would simply be asked to continue making the monthly payments from where they stopped.
Tip: Be extra attentive when going through the terms of the agreement as some companies might use the words "deferment" and "forbearance" interchangeably.
Just like loan deferment, forbearance is a temporary postponement of payments granted by the lender as an alternative to forcing the borrower into default.
The terms of the agreement can differ and should be negotiated between the lender and the borrower.
Though in rare cases the lender might grant a full moratorium on making payments for a specified period, typically, the borrower would be required to continue to make interest payments while the principal payments are put on pause.
The options available to college students would depend on the type of loan they have (federal student aid, federal student loans, or a loan from another provider).
A lot of student loans are already set up to be deferred until the customer is no longer in college. Student loan forbearance can provide temporary breathing room as well, but students are generally encouraged to at least continue making interest payments as they accrue during the ‘pause’.
Individuals who find it difficult to continue making their mortgage payments might be able to qualify for mortgage deferment.
Do bear in mind that some service providers have a requirement that such a financial agreement should be requested within a certain amount of time after a disaster occurs (you lost your job, are facing unexpected medical bills, etc.), so call the servicer as soon as you realize that you’re struggling.
The company would usually be willing to offer you mortgage forbearance in such a situation, while mortgage deferment can be used to take care of the payments that you skipped during the forbearance period.
In court, a deferred payment typically means the defendant agreed to cover the expenses at the end of a certain period.
In some cases, the defendant would be allowed to sign a modified payment agreement or an installment payment agreement, both of which involve making periodic payments.
A deferred payment annuity refers to an insurance product that will provide payments to the buyer in the future.
This allows the investment’s principal balance to grow before the payments get initiated to the owner of the deferred payment annuity.
This term is used to describe income that has already been received but not earned. The simplest example is payments for goods that are yet to be delivered.
Those responsible for financial accounting should remember that deferred payments cannot be considered revenue until they are earned. This means that they are reported on the balance sheet as a liability.
Once the service is provided or the good gets delivered, the liability will decrease, and the amount will be recognized as income on the income statement.
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