Know about Personal Loan Deferment

In an era marked by financial uncertainties and unexpected challenges, personal loan deferment has emerged as a crucial lifeline for borrowers. This financial mechanism, pre-approved by regulatory authorities, allows individuals to temporarily pause their loan payments, providing much-needed relief during challenging times.

At the same time, loan deferments also raise vital questions about their potential impact on credit scores and the broader financial landscape. In this article, we will take a closer look at personal loan deferments and understand their impact on your financial profile.  

Understanding What is Personal Loan Deferment

Deferment is an approved, short-term suspension of payment obligations for a debt, which can include personal loans.

To secure a deferment, your initial step involves contacting your lender and detailing your circumstances. This may include scenarios such as job loss, reduced work hours, being affected by a national emergency, or facing substantial medical expenses. Lenders typically reserve deferment options for individuals facing financial hardships.

While lenders generally aren't obligated to grant deferments for personal loans, most banks are open to collaboration. From a financial perspective, it's more cost-effective for them to pre-approve a borrower for a temporary payment suspension than to initiate debt collection proceedings.

How Does Personal Loan Deferment Work?

When you opt for a loan payment deferment, you are essentially postponing the payment for a specific month or months. For instance, if your request for deferment is approved for the month of May, you can skip making the payment for May and resume regular payments starting in June.

It is important to emphasise that loan deferment requires approval and the dates play a crucial role. So if your deferment starts on, say, May 5th but your usual instalment payment date is May 1st, you must make the May payment and can then defer the payment for June.

Typically, banks impose a nominal fee for instalment deferment. If, after the deferment period ends, you still find it challenging to make loan payments, you can contact your bank and request another month's deferment.

Each time you wish to skip a loan payment, you must contact your bank and obtain approval. In case you fail to do so, the bank will not consider it a deferment, leading to substantial fees and an increase in the interest rate.

Banks Providing the Option of Personal Loan Deferment

Typically, most banks in the UAE provide the opportunity for personal loan deferment. Nevertheless, certain banks have adjusted their loan repayment schedules for customers in accordance with the Central Bank of UAE's directives.

Here is a list of banks that offer personal loan deferment in the UAE -

• Abu Dhabi Commercial Bank (ADCB)
• Abu Dhabi Islamic Bank (ADIB)
• Emirates Islamic Bank
• Emirates NBD
• Mashreq Bank
• Dubai Islamic Bank
• First Abu Dhabi Bank (FAB)

Under What Scenarios is Personal Loan Deferment Option Available?

Listed below are the types of individuals eligible for loan deferments -

• Individuals who are recipients of government aid based on their economic circumstances
• Those currently receiving unemployment benefits
• Students engaged in graduate fellowships
• Individuals enrolled in approved rehabilitation training programs
• Active-duty military personnel
• Individuals undergoing cancer treatment

Important: If you don’t fall into any of the aforementioned categories, it does not necessarily mean that you are ineligible for deferment. It is advisable to reach out to your lender to ascertain whether you meet the qualifications for deferment or explore alternative solutions like loan restructuring or refinancing.

How to Defer a Personal Loan Payment?

If you find it difficult to meet the obligations of a personal loan, you can follow these steps to request a deferment - 

• Get in touch with your bank or lender. Virtually all lenders require you to initiate contact to explore deferment possibilities.
• Gather supporting documentation. This is because lenders might request documents or evidence of your financial hardship such as proof of unemployment benefits.
• Prepare for the deferment decision. Keep in mind that lenders may not grant hardship applications immediately, so be ready to continue maintaining your loan in good standing while they assess your situation.

It is important to note that failing to make timely payments or neglecting them altogether without notifying your lender about any issues can adversely affect your credit Score. This can also lead to your loan being deemed in default.

How Does Interest Work for Personal Loan Deferment?

Even if the bank approves of personal loan deferment, you would still accrue interest on the loan. You can get a better idea about the charge by reviewing your recent loan statement.

The payment is bifurcated into principal and interest. This interest is the cost you pay for deferral and it gets tagged on your loan. Thus, you would have to pay the same back once you start making payments again.

In certain instances, lenders may exercise greater flexibility by not imposing interest charges. This leniency typically occurs during situations like natural disasters, global pandemics, or other widespread factors beyond individuals' control.

It's worth remembering that this leniency is not mandatory — each lender may establish their own guidelines regarding the imposition of interest in various circumstances.

Alternatives for Personal Loans During Cash Crunch

Personal loan deferment is a temporary measure and should not be relied upon as a long-term solution for debt management. If you require an alternative approach that can be sustained over a more extended period or if deferment is not available to you, there are several other options to explore -

• Refinancing the loan - You can explore the possibility of refinancing your personal loan, which may allow you to reduce your monthly payments by extending the loan's repayment term. If your creditworthiness has improved since you initially obtained the loan, refinancing could even offer a lower annual percentage rate (APR), potentially saving you money over the loan's duration. Keep in mind that securing the lowest interest rates typically requires having a good to excellent credit score and a low debt-to-income ratio.
• Inquire about a modified payment plan with your lender - If you're struggling to meet the payment terms outlined in your original loan agreement, your lender may propose a loan modification plan. This plan could involve reducing the interest rate, extending the repayment period, or potentially qualifying you for a different type of loan. It's essential to be aware that extending the repayment period may result in higher overall interest costs, although it can make monthly payments more manageable.
• Consult a debt counsellor - If you find it challenging to meet your personal loan obligations, seeking guidance from a debt counsellor affiliated with a credit counselling organisation can be a wise decision.

A debt counsellor can provide valuable advice on money management and debt consolidation options, and connect you with useful resources to address your financial difficulties.

Does Personal Loan Deferment Impact Your Credit Score?

While the personal loan deferment benefit is pre-approved by the lending institutions and banks, there exists significant uncertainty among loan holders regarding the potential impact on their credit scores when they choose to skip loan payments.

When banks or financial institutions grant deferment assistance, they refrain from reporting it as a missed or skipped payment to the AECB (al etihad credit bureau) to prevent adverse effects on the credit report. It is essential to monitor your credit report to ensure that no such records have been created.

Your credit score will only be negatively affected if your bank denies your loan deferment request, and you proceed to skip payments. It is crucial not to miss loan payments until you have received an official approval letter or confirmation from the bank. Additionally, make sure to carefully review the start and end dates of the deferment period.

Importantly, the loan payment deferment option extends beyond personal loans to encompass various financial products such as auto loans, home loans, business loans, and more.

Before availing yourself of the loan deferment service, it is crucial to carefully read and comprehend the terms and conditions established by your bank.