What Is a Deferred Payment and How Does it Work?

Last Updated November 21, 2024

Sometimes, people want to make an expensive purchase, but they haven’t obtained enough cash to pay for the item in full upfront. To serve the needs of these customers, service providers, banks, and other financial institutions offer deferred payments.

A deferred payment allows business owners and consumers to make that purchase in installments rather than as a one-time lump payment. But how do these deferred payments work more specifically? Let’s explain.

What Is a Deferred Payment?

A deferred payment is an agreement between a creditor (or lender) and debtor (or borrower) where payment is delayed until a future date. This also involves dividing payments into multiple installments over an extended period of time.

A common example is a car loan. Often, a lender will allow the borrower to skip the first month of a payment or pay a lower rate for that first month. After that first month, the borrower will start paying the regular installment amount.

How Does a Deferred Payment Agreement Work?

Each deferred payment plan looks different. Here’s an example of how a standard agreement might work:

Say a piece of equipment costs $10,000. The borrower can’t afford to make a one-time payment of $10,000, so the seller agrees to allow the borrower to pay it off through five separate payments over five months. Therefore, the borrower would owe $2,000 per month (calculated by dividing $10,000 by 5 months).

There are two types of deferred payments: personal loan deferments and business loan deferments, which we will explain further in the next two sections.

Personal Loan Deferments

A personal loan deferment is a personal loan with deferred payments, meaning payments are postponed by the lender for an agreed-upon period of time. Personal loan deferments typically range from one month to one year.

Personal loan deferment plans are not an option for every borrower. It requires approval from the lender, and conditions regarding the deferred payment plan will vary based on a few factors:

• Loan type: A federal student loan will have a different deferred payment structure than a car loan, for example.
• Lender policies: Each lender has different policies and criteria for borrowers seeking personal loan deferments. Research lender policies beforehand.
• Financial hardship: Financial institutions have financial hardship policies, meaning you are more likely to qualify if you can prove you are facing injury, illness, or disability.
• Borrower’s credit history: If you have a history of paying back loans on time, you have a better chance of qualifying for a more flexible deferred payment plan.

Business Loan Deferments

Business loan deferments are sought after by businesses hoping to pause payments on a loan for a certain period of time, often due to extenuating circumstances such as a natural disaster or an event causing a global economic crisis, such as the COVID-19 pandemic.

One example of the Small Business Administration offering deferred payment options en masse was after Hurricane Katrina. In 2005, they approved more than 160,000 SBA disaster loans for businesses throughout the Gulf Coast following Hurricane Katrina, Hurricane Wilma, and Hurricane Rita. In this case, many existing loans were refinanced, with businesses being offered a 4-year deferment period.

An SBA disaster loan is an example of a loan with a deferment option, as payments are paused for an extended period. Standard business loan deferments, however, are geared toward businesses needing shorter-term solutions. It’s difficult to qualify for a long-term business loan deferment without some sort of uncontrollable outside factor that’s affected your business’s financial situation. Some banks will offer brief, 1 to 3-month loan deferments for businesses struggling from internal financial issues, such as serious cash flow problems. If the business can demonstrate to their lender that a short-term business loan deferment can revert their cash flow struggles and get business operations back on track, they may have a better chance at being approved for the business loan deferment.

Most standard business loan deferments are determined and handled on a case-by-case basis, so it will be a matter of you working it out with your bank. As always, it’s important to be transparent and honest with your lender.

Remember that typically, business loans don’t impact your personal credit score. But your inability to follow the loan deferment plan will definitely impact your business credit score. If you aren’t confident that you’ll be able to pay off the business loan deferment, you should not apply.

Examples of Deferred Payments

These are numerous examples of deferred payment plans, but let’s explain some common scenarios.

Deferred Payments on a Car

Deferments on car payments are very common, particularly for those who qualify for financial hardship.

For instance, during the COVID-19 pandemic, Hyundai rolled out a new deferred payment program. The South Korean car company offered up to three months of deferred payments in one-month increments to their existing customers. Hyundai’s deferred payments covered those who lost their jobs from March to May 2020 or those with medically related hardships caused by COVID-19.

Student Loan Deferred Payments

It is estimated that 43.5 million Americans have student loan debt.

Student loan deferred payments are the life rafts that keep many college graduates financially afloat. However, they work a bit differently than other deferment plans because student loan deferments involve simply pausing repayments for a certain period of time, rather than delaying the payments. Student loan forgiveness can be confused with student loan deferments, but it is an entirely separate process.

You may apply for student loan deferment if you’re in a short-term financial crunch and can’t afford your monthly loan payment. If you’re in a position of financial hardship because you lost your job, you will likely qualify. The downside is that if the deferment is granted, you’ll likely still be held liable for the accruing interest throughout the deferment period. Studentaid.gov provides a table to determine whether or not you’d be responsible for accrued interest.

Bobby Bonilla’s Deferred Payments

Sports fans might remember this situation, although this was more of a deferred salary than a deferred payment, it is illustrative of the idea.

In 1999, the New York Mets decided to release outfielder Bobby Bonilla a year before his contract ended. The Mets owed him $5.9 million. Instead of paying him the $5.9 million, the Mets and Bonilla agreed to a deferred payment plan, where the Mets would pay Bonilla in installments every year from 2011 to 2035, with 8% annual interest. (The Mets agreed to this arrangement because they were struggling financially.)

Deferred Payments Loan Calculator

Because of changing interest rates, calculating deferred payments is not as easy as a simple math equation. Thankfully, you can utilize a deferred payments loan calculator to quickly determine how much you’d owe in each period if you’re approved for a deferred payment plan.

Advantages and Disadvantages of a Deferred Payment Plan

To summarize, here’s a brief table highlighting the advantages and disadvantages of entering into a deferred payment agreement.

Advantages	Disadvantages
Costly purchases or bills are made more affordable	Interest rates on the deferment will cut into your profits (for business deferments) or personal bank account (for personal deferments)
It significantly reduces the immediate blow to your available working capital or cash on-hand	Increases risk, as you can get into trouble with the lender if you cannot afford the repayment
It can help keep you afloat in periods of short-term financial hardship	Qualifying for a deferred payment will not help solve long-term business or personal financial challenges

If you’re a business owner and can afford slightly lower profit margins, deferred payment plans provide several benefits. Ultimately, it’s up to you to weigh the pros and cons to determine whether a deferred payment plan is sensible for your respective bills or expenses.

In-Summary: Deferred Payments

Loan deferments refer to instances where a buyer (or borrower) and seller (or lender) have a contractual agreement in place to postpone and divvy up payments over a certain period of time.

Deferred payment plans can be highly beneficial for borrowers. However, they also bring on a level of risk. Borrowers may overestimate their ability to pay back a loan over time or unforeseen circumstances may bring about a tough time repaying a loan. The housing crisis of the late 2000s is an unfortunate example of this coming to fruition.

For business owners considering business loans that are only attainable via a business loan deferment, it’s imperative to do your homework to make sure you can pay-off the loan without trouble.