Definition
Deferred payments are payments that are scheduled to be made at a future date rather than at the time they are typically due. This financial mechanism is frequently used in arrangements involving loans, mortgages, and other types of credit. The deferment can apply to the principal, interest, or a combination of both.
Examples
-
Graduated Payment Mortgage (GPM): In a Graduated Payment Mortgage, the principal payments and some interest payments are deferred during the first few years, typically 3 to 5 years. The payments start lower and gradually increase until they level out, making it easier for borrowers to manage their initial financial obligations.
-
Student Loans: Many student loan schemes offer a deferment period where the borrower is not required to make payments while they are still in school or shortly after graduation.
-
Retail Financing: Some retailers offer deferred payment plans for large purchases, allowing customers to take the item home and start payments at a later date, usually with the stipulation that interest may accrue during the deferment period.
Frequently Asked Questions (FAQs)
What is the advantage of deferred payments? Deferred payments provide immediate financial relief to borrowers, making high-value purchases or investments more manageable initially. This can help individuals and businesses align their payment schedules with their income cycles.
Are there any downsides to deferred payments? Yes, one of the downsides is the potential accumulation of interest during the deferment period, which can increase the overall cost of the loan. Borrowers should carefully read the terms to understand all related expenses.
Do deferred payment plans affect my credit score? Deferred payment plans themselves do not typically affect your credit score negatively as long as you adhere to the agreed terms. However, missing scheduled payments after the deferment period will, indeed, impact your credit score.
Can deferred payments be renegotiated? In some cases, deferred payments can be renegotiated, especially if the borrower is facing financial hardship. Lenders may offer alternative arrangements or extend the deferment period under certain conditions.
What happens if I make payments during the deferment period? Making payments during a deferment period can significantly reduce the amount of interest accrued, leading to lower overall borrowing costs.
Related Terms
- Principal: The main amount borrowed that does not include interest or additional fees.
- Interest: The cost of borrowing the principal amount, usually expressed as a percentage rate over time.
- Loan Deferment: A contractual arrangement allowing for the postponement of loan payments.
- Forbearance: A temporary suspension or reduction of loan payments granted by the lender in response to borrower’s financial difficulties.
Online Resources
- Consumer Financial Protection Bureau (CFPB): Deferred Interest
- Federal Student Aid: Understanding Loan Deferment
- Investopedia: Deferred Payment Definition
References
- Investopedia Media Network. “Deferred Payment Definition.”
- Federal Student Aid. “Understanding Loan Deferment.”
- Consumer Financial Protection Bureau (CFPB). “Deferred Interest Platforms.”
Suggested Books for Further Study
- “Managing Your Money: Financial Planning, Budgeting, and Investing” by Jane Bryant Quinn
- “Personal Finance for Dummies” by Eric Tyson
- “The Millionaire Real Estate Investor” by Gary Keller
