Loan deferment, loan moratorium period, and loan forbearance are all options available to borrowers struggling to pay their loans. Despite the frequent confusion between these terms, they refer to different agreements between the borrower and lender.
Loan Deferment:
Loan deferment is a written understanding agreement between the borrower and the lender that allows the borrower to postpone payments on their loan temporarily. During the deferment period, the borrower may not be required to make any payments, and interest may or may not accrue on the loan balance. Loan deferment is typically available to borrowers experiencing financial hardship, such as unemployment or a medical emergency.
Example:
Mr. A has an education loan that he struggles to pay due to a recent job loss. He contacts his loan servicer and requests a deferment, which is granted for six months. During the deferment period, Mr. A is not required to make any payments on his loan, and interest does not accrue on his subsidized loan. After the deferment period ends, Mr. A must resume paying for his loan.
Loan Moratorium Period:
A loan moratorium period is a temporary suspension of payments on a loan, typically due to a specific event or circumstance that impacts the borrower’s ability to make payments. During the moratorium period, the borrower may not be required to make any payments, and interest may or may not accrue on the loan balance. Lenders or government agencies often implement loan moratorium periods in response to natural disasters, economic downturns, or other unforeseen events that impact borrowers.
Example:
- In 2020, the Indian government announced a moratorium period for loans in response to the COVID-19 pandemic. The moratorium allowed borrowers to suspend loan payments for six months without incurring late fees or penalties.
- In the case of education loans, students will generate income after their education, so the lender can grant a moratorium period up to the completion of the study and getting a job.
During the moratorium period, interest continued to accrue on the loan balance, which meant that borrowers would ultimately pay more in interest over the life of the loan.
Loan Forbearance:
Loan forbearance is an agreement between the borrower and lender that allows the borrower to reduce or suspend payments on their loan temporarily. Unlike loan deferment, interest always accrues on the loan balance during forbearance, which means that the borrower will ultimately pay more in interest over the life of the loan. Loan forbearance is typically available to borrowers experiencing financial hardship, such as a medical emergency or loss of income.
Example:
Miss. B has a car loan that she struggles to pay due to unexpected medical bills. She contacts her lender and requests a forbearance, which is granted for three months. During the forbearance period, Miss. B’s monthly payments are reduced to Rs.500/-, a significant reduction from her regular payment of Rs.3,000/-. However, interest continues to accrue on the loan balance, which means that Miss. B will ultimately pay more in interest over the life of the loan.
Differences Between Loan Deferment, Loan Moratorium Period, and Loan Forbearance:
- Loan deferment is an agreement to postpone payments on a loan, while a loan moratorium period is a temporary suspension of payments.
- Loan deferment may or may not accrue interest, while a loan moratorium period always accrues interest.
- Loan forbearance is an agreement to reduce or suspend payments but always accrues interest.
While loan deferment, loan moratorium period, and loan forbearance provide temporary relief for borrowers experiencing financial hardship, it’s essential to understand the terms and implications of each option before agreeing with a lender or loan servicer. By exploring all available options and communicating with the lender or loan servicer, borrowers can make informed decisions about managing their debt and financial future.
It’s important to note that loan deferment, loan moratorium period, and loan forbearance are temporary solutions for borrowers experiencing financial hardship. While these options can provide relief in the short term, they do not eliminate the underlying debt or address the root cause of the borrower’s economic challenges.
Borrowers struggling to make payments on their loans should consider other options for managing debt and improving their financial situation. This may include seeking assistance from a credit counseling agency, exploring income-driven repayment plans, or negotiating a loan modification or settlement with the lender.
It’s also essential for borrowers to communicate regularly with their lender or loan servicer throughout the deferment, moratorium, or forbearance period. This can help ensure that the borrower is aware of any changes in their loan status or requirements and can help them prepare for when payments will need to resume.
Finally, borrowers must prioritize their financial well-being and improve their financial health over the long term. This may include creating a budget, building an emergency fund, and exploring additional sources of income. By taking proactive steps to improve their financial situation, borrowers can regain control of their finances and achieve excellent financial stability.