The Good and Bad of Deferred Loans

Many personal loan deals feature an initial payment holiday whereby you don't have to start making payments on a loan for several months after receiving the advance. These are known as deferred loans, and are available both as unsecured loans and secured loans. Are they a feature worth looking for when you're in the market for a new loan?

The main benefit to them is that they can provide a bit of breathing space if your finances have got out of control. You can use the loan to pay off your pressing debts, and then use the deferment period to get your budget back in shape before the repayments start. For this reason, they are probably best suited to being used as part of a debt consolidation program.

It's not all good news though. The main catch to deferred loans is that interest is still mounting up during the payment holiday period, and so it's not exactly the free lunch that it at first might appear, and the true interest rate of the loan might end up being higher than the figure you signed up for.

So, should you take out such a loan? If you can use the deferment period productively to deal with your financial problems, then the answer could be yes. However, if the attraction of a payment holiday is that it's in some way something for nothing, then this isn't really the case and you should probably look elsewhere, such as for a loan with a lower rate and no deferred repayments.