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What is a Deferred Payment: Meaning, Components and Advantages

  •  5 min read
  • 0•
  • 21 Nov 2024
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.

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.

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.

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.

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.

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.

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.

Advantages Disadvantages
Enables you to buy expensive goods or services with a lower initial financial outlay.
It may include interests that can reduce overall profitability for businesses or reduce the value of personal savings.
Provides temporary relief from the immediate stress on available working capital or cash reserves.
Increases financial stress if the borrower is unable to meet the deferred repayment obligations.
Serves as a useful tool to manage a short-term financial crisis.
Does not help in solving long-term business or personal financial problems.

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.

FAQs on Deferred payments

No, deferred payments are not the same as instalments. Instalments allow you to pay a specific sum over a certain period of time. In contrast, deferred payment enables you to postpone the complete payment.

Deferred payment is used in several industries, including e-commerce, retail, and financial services. Many online platforms and marketplaces offer deferred payment options.

The deferred payment option is often available on both small and big purchases. It may be used for gadgets, furnishings, and even professional services.

When a company has deferred revenue, it means that a buyer or client pays in advance for an item or service that will be provided later. The payment is considered a liability since the product or service may not be supplied, or the customer may cancel the transaction.

No, a deferred payment generally doesn’t affect the CIBIL score. However, your CIBIL score may be affected if you miss payment deadlines after the deferrement period.

Deferred payments may be a good option for borrowers who cannot repay a loan for a certain time due to financial problems. However, it may involve costs like additional interest rates on the deferred amount.

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