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Whether you are running a household or a business, there are times when managing expenses or debt can be difficult. In such cases, you can enter into a deferred payment arrangement to avoid any penalties.
But what is a deferred payment? How does a deferred payment work? In this guide, we will define deferred payments and also explain how such agreements work. So read on.
What Is a Deferred Payment?
A deferred payment is basically a delayed payment, either completely or partially, to allow a customer or a debtor some leniency to fulfill their financial obligations. When a debtor or a customer does not have cash to pay their invoice on time, they can opt for a deferred payment arrangement.
Deferred payments apply to mortgages, loans, shopping, and several investment vehicles. A deferred payment option is considered an exotic option as it is more complex and highly illiquid.
For instance, several e-commerce sites offer you the option to buy now and pay later. Another example of deferred payments is when loan borrowers delay their loan payments a little later than the scheduled date. However, the lender has to agree first before you defer your payments.
How Does a Deferred Payment Work?
A deferred payment delays payment until a later date. However, in the case of a loan, you will first need to ask your lender whether they offer the deferred payment option. You should also find out how long you can defer a payment, and whether you’ll need a new repayment plan.
The next and final step involves taking care of the required paperwork and filling out any applications necessary. You must specify for how long the payment will be delayed and also set up a schedule for the new payment.
However, your lender may require you to have a certain credit score to qualify for this option. They will have to prepare themselves for higher illiquidity in the case of deferred payments.
Deferred Payment Examples
Deferred Payments in Student Loans
College students can opt for loan deferment for any given amount of time if they cannot pay their student loans for any reason. Most of the student loans are deferrable for as long as the student is in school.
However, the option to defer payments for students depends on whether they have federal student aid, federal student loans, or third-party student loans. Some student loans may also require you to be registered for at least half-time in classes, in order to qualify for deferral.
Deferred Payments in Investments
In the world of investments, investors have the option to pick from a variety of investments that come with the deferred payment option. For instance, one of the most common among these is deferred payment annuities.
Deferred payment annuities let investors get regular payouts over a certain time period. Another common example is the Individual Retirement Accounts (IRAs), as they come with scheduled payouts after a specific date.
Deferred Payments in Mortgage
If you are in a tight financial situation and are unable to make your mortgage payments, you may be able to defer those payments. Deferred payments in mortgage allow the owner to delay their payments for a set time period.
However, this depends on the lender and whether you qualify for this option. Not every lender will allow you to defer payments for more than a year.
During a mortgage loan deferment, you won’t be expected to pay your monthly payments. Interest will also not be accrued on any outstanding monthly payments.
Forbearance vs. Deferred Payments
Forbearance is a type of deferred payment that applies to mortgages and loans. It is quite similar to deferred payments. However, the difference lies in how the interest rates are charged.
A mortgage forbearance is applicable to a homeowner who is in default on their mortgage. The lender can suspend or lower the mortgage payments in forbearance, for a certain time period.
In this type of agreement, the lender will not be able to foreclose on the home and both parties will come to an agreement on the payment plan so that the borrower becomes current on the mortgage payments.
In a student loan forbearance, loan payments are lowered or suspended for a certain time period. It is only available for qualifying students.
However, during this period, the interest will still accrue on the student loan and the student will have to pay the accrued amount when the payment period resumes. The U.S. Federal government has various forbearance programs set up for students undergoing hard times.
Forbearance suspends or reduces your monthly payments, whereas deferment delays it.
What Is a Deferred Income Payment on Form 1099?
If you see the term “deferred income payment” on a Form 1099, it refers to the income that has not yet been earned but received. It can be for the products or services that have not been provided yet.
Deferred income is taxable income and the company has to pay deferred income taxes on it. These taxes are to be paid eventually and are not due for payments until a future date.
Conclusion
We hope this guide answers your question, “what is a deferred payment”. A deferred payment allows a borrower or customer to delay payments until a later date. This payment option applies to loans, mortgages, retirement plans, and even shopping. It offers an opportunity to delay payments in times of financial emergency.
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