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What is the Deferment Period?


 

In the loan industry, there are certain periods of time that borrowers and lenders alike need to be aware of. There is the standard “you have this specific amount of time to repay the loan” period, but that is common knowledge. Other periods are ones that outsiders don’t know about until they have acquired a loan. One of them is referred to as the ‘deferment period’.

 

What is it and what occurs during this time?

 

The deferment period is a time in which a borrower is not required to pay interest or repay a loan’s principal. The deferment period pertains to mortgages, student loans, certain types of options, and claims to benefits in the insurance industry. Also, the deferment period refers to the period following a callable security issue during which the issuer is not permitted to call the security.

 

The borrower needs to provide documentation in order to properly establish eligibility for a deferment when the deferment commences. A deferment period’s length can vary and is set up in advance, often by a contract between the borrower and the lender. For example, a student loan deferment usually lasts up to three years, whereas many municipal bonds have a 10-year deferment period.

 

Grace vs. Deferment

 

A common misconception is that a deferment period is similar to – almost the same as – a ‘grace period’. These particular times are commonplace with installment loans like federal student loans. These typically have a grace period of six months following the separation from school. The same can be said for car loans and mortgages, which both usually have a grace period that lasts 15 days.

 

The primary difference between these two periods is when a borrower meets the qualifications for each delayed payment option on a loan. A grace period is a period that is automatically granted on a loan in which the borrower is not required to pay the issuer any money toward the loan. The borrower, meanwhile, does not receive penalties for not paying.

 

Payments may be made during these periods, but they are not mandatory. Student loan payments taking place during grace periods and deferments effectively reduce capitalizing and compounding interest scenarios. Paying other loans during deferment periods also diminishes the balloon when those loans come to an end.

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