What is a deferred payment loan?
It is a loan where repayments are postponed for an agreed period — common with student loans, medical financing, some business lending and 'buy now, pay later' car deals. The key point is that deferring payments almost never means deferring interest. In most agreements interest keeps accruing throughout, so the debt grows while you are not paying anything toward it.
What does it mean when interest is capitalised?
Capitalising means the interest that built up during deferment is added to your principal at the end of the period. From that moment you pay interest on the interest. On a 20,000 loan at 6 percent deferred for two years, roughly 2,500 of interest is added, and every future payment is then calculated on about 22,500 rather than 20,000. That compounding is why capitalisation costs noticeably more than simple accrual over the life of the loan.
What is the difference between capitalised, simple and subsidised interest?
Capitalised interest is added to the balance and then earns further interest. Simple interest accrues during deferment but is not compounded — it is repaid alongside the principal without growing. Subsidised means someone else, typically a government scheme, pays the interest during deferment, so your balance is untouched and deferring costs you nothing. This calculator models all three because the difference between them is usually larger than the difference a rate change would make.
Should I pay the interest during the deferment period?
If you can afford it, usually yes. Paying just the interest keeps the balance flat, which removes the capitalisation entirely and typically saves a substantial amount over the loan. It is often a small monthly sum compared with the eventual repayment. Many lenders allow interest-only payments during deferment even when full payments are not required — worth asking, because it is rarely offered proactively.
Does deferring hurt my credit score?
An agreed deferment arranged with your lender in advance generally does not, because the account is not reported as delinquent. Simply stopping payments without agreement does damage it. The distinction matters: contact the lender before missing a payment, get the arrangement confirmed in writing, and check how they will report the account during the period.
When is deferring actually the right choice?
When the alternative is missing payments, or when income genuinely starts later — a student who will earn nothing until graduating, or a business whose revenue begins after a build-out. In those cases the cost buys real breathing room. It is a poor choice when used to afford something you could not otherwise afford, since the payment you could not manage now becomes a larger one later.