What is a Deferred Payment: Meaning, Components and Advantages

A deferred payment is an agreement that allows you to repay a debt later. A person may incur debt when he takes a loan or purchases a product. Depending on the agreement, the repayment can be postponed for a set period. Sometimes, a full payment is required by a specific date. However, you can make multiple payments in small sizes until the entire sum is paid. Let’s learn about it today. This blog discusses what a deferral payment is in detail.

Key Highlights

• A deferred payment is an agreement that allows you to postpone a loan repayment for a specific period.

• Components of deferred payments include the deferred amount, deferral period, repayment schedule, start date, frequency, repayment amount, etc.

• Deferred payments may involve interest, increasing the total loan amount and potentially extending the loan period.

• Temporary relief from financial stress is the primary benefit of deferred payments, making it easy to manage a short-term financial crisis.

What are Deferred Payments

A deferred payment is an arrangement with your lender to postpone loan payments to a later date. Your loan payments are paused until the end of a fixed deferral time. You have to resume the payments after that. Some lenders may allow you to return both the principal and interest amount at a later date without additional interest. Others may charge interest for the deferred time period.

Different types of loans, lines of credit, and credit cards may offer deferred payment options. However, all lenders may not provide this option.

Examples of Deferred Payments

Now that you understand the defer payment meaning, let’s look at some examples. You generally get deferred payment options in the following instances.

1. Student Loans: Borrowers can get a deferred payment facility on student loans until graduation or for a predetermined amount of time.

2. Car Loans: Some lenders allow you to postpone your initial payments on car loans.

3. Credit Cards: Credit card issuers may allow you to postpone the payments for a set period of time.

4. Mortgages: Lenders can provide the facility to temporarily postpone your payments during financial stress.

Components of a Deferred Payment

Along with the deferral payment meaning, it’s essential to know the elements involved in it. Deferred payments include the following components.

• Deferred Amount: This is the exact amount that shall be deferred.

• Deferral Period: This is the time period in which you will not have to make payments on the deferred amount.

• Repayment Schedule: It is the plan to repay the remaining loan amount. It includes the start date, frequency (monthly, annually, etc.), and amount per installment.

• Start Date: It is the date on which the repayments will resume.

• Frequency: It specifies whether the repayments will be made monthly, annually, or in one lump sum when the deferred period ends.

• Amount: It is the exact amount you will pay for each instalment.

• Interest: The lender may or may not levy interest on the deferred amount. If it is levied, the current interest rate will be specified.

• Security: Some lenders may charge a security interest in your property (such as your home).

• Termination: This section discusses how any party can end the agreement.

How does a Deferred Payment Work?

Deferred payments may or may not be included in a loan agreement. For example, student loans may allow you to defer repayment until six months after graduation. A business may provide an option to defer payments for 100 days. These agreements might provide you with flexibility while looking for a new job. They can also allow you to spread out your payments on a product or service that you may have needed to replace. However, they might involve additional costs.

How Deferred Payments Impact Interest

The loan repayment amount consists of two parts. One part of your payment goes toward the principal amount, while the remaining part goes toward interest payments. The interest is calculated on your remaining principal amount on a monthly or yearly basis. Therefore, a higher loan amount leads to a higher interest.

When you defer a payment, interest is usually calculated on a daily basis. However, your remaining loan amount is not reduced. Instead, the interest is added to your loan and your debt increases.

Deferring a payment may result in:

• Extending the loan period
• More interests
• Higher repayment amount at the end of your loan.

Benefits and Drawbacks of Deferred Payments

Let’s now look at the benefits and drawbacks of deferred payments. Here’s a table highlighting the key advantages and disadvantages of a deferred payment facility.

Conclusion

Deferred payment allows you to pay for products or services later, giving you greater flexibility and convenience. Deferring payment allows you to manage your cash flow better and prevent immediate financial distress. When choosing a deferred payment option, thoroughly check the interest rate, payback terms, and any additional fees or penalties. It is also important to evaluate your financial condition and consider whether deferring the payment affects your long-term objectives.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. It is not produced by the desk of the Kotak Securities Research Team, nor is it a report published by the Kotak Securities Research Team. The information presented is compiled from several secondary sources available on the internet and may change over time. Investors should conduct their own research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.

Investments in securities market are subject to market risks, read all the related documents carefully before investing. Brokerage will not exceed SEBI prescribed limit. The securities are quoted as an example and not as a recommendation. SEBI Registration No-INZ000200137 Member Id NSE-08081; BSE-673; MSE-1024, MCX-56285, NCDEX-1262.