What is Deferred Payment? Meaning, Benefits & Examples

Whether you are a student pursuing a degree or planning to buy a car, the expense of these purchases has a significant financial impact. To ease the burden, many businesses and lenders offer a deferred payment plan to ease the financial burden of such expenses. E-commerce platforms also provide options for gadgets like mobile phones, laptops, etc on deferred payment plans, making it easier for consumers.

This article explores deferred payment meaning, deferred payment plans and their benefits with examples. 

What is a Deferred Payment?

A deferred payment is an agreement to pay for something at a later date. The payments are divided into multiple instalments over a period of time. For instance, consider a car loan. When purchasing a car, the lender might offer a lower first-month payment, followed by equal instalments spread over several months, making the purchase much more affordable.

How Deferred Payments Work?

A deferred payment is an agreement between two parties, the lender and the borrower. The payment terms allow the borrower to make a purchase and pay the amount in instalments over time. This arrangement often has no interest rate and is different from a personal loan. This payment structure offers several benefits to the borrower by making the repayment spread over a few months. The lender benefits by making a sale and managing cash flows. 

Deferred Payment Examples

Deferred payment plans provide flexibility, allowing consumers to enjoy the purchase. Few popular examples are as follows: 

Mobile Phones: Many e-commerce platforms like Amazon and Flipkart offer deferred payment in the form of no-cost EMI for mobile phones. The customer can buy and take the phone home while paying the instalments in over a few months with no EMI cost. 

Credit Card Purchases: When customers buy anything via credit card, they have 30-45 days to pay back the amount, depending on the credit card’s billing cycle. This is a common form of deferred payment, where the customer can purchase and pay the instalments without any EMI cost. 

Online Courses: If a person wants to learn an online course, many platforms offer a deferred payment option. This allows the person to learn the course and pay the course fees over time. 

Also Read: What is a Loan Repayment Schedule and Why is it Important?

What is a Deferred Payment Agreement and How it Works?

A deferred payment is an agreement that is a contract between two parties where one party pays the other party at a later date. This arrangement allows the buyer to pay in instalments, easing any financial burden. The borrower gets to use their purchase and agrees to make the payments at a later date. The borrower can use the purchased item immediately while making the payment over time. 

These are some common deferred credit agreements:

Student Loans: This agreement allows the student to pay the course fees after graduation or when they land a job. It allows students to focus on their education without worrying about the immediate expenses.  

Buy Now Pay Later: This agreement is most commonly used for product or service purchases. The buyer pays the initial instalment to purchase the product or service and the remaining amount is paid in the agreed-upon instalment period. 

Credit Card: This is also a type of deferred payment where the cardholder is allowed to make a purchase and pay the remaining amount in the next billing cycle.

Benefits of Deferred Payment

Deferred payment has the following key benefits:

Eases Cash Flow: Deferred payments allow both the customer and business to manage their cash flow by maintaining liquidity. This allows them to allocate funds towards investments that will earn interest or returns.

Flexibility: This type of payment also allows the buyer the flexibility to manage their funds by allocating them to other urgent needs like essential items or operational costs.

Convenience: When making a large purchase, this payment allows the buyer to make that purchase and spread the cost over a period of time. One can easily make an expensive purchase without the immediate burden of paying the entire amount in one go. 

Difference Between Deferred Payment and Installment Plans

Deferred payment and instalment plans are among the few payment plans offered by businesses to offer ease in payment to the consumer. The table below points the difference between them: 

How to Qualify for Deferred Payment Plans?

Lenders or businesses look at certain factors when offering deferred payment plans to a customer. The key factors considered are as mentioned below: 

Credit Score: Most businesses or lenders check the credit score of the individual before offering a deferred payment plan. A good credit score indicates a stable credit history and a high likelihood of repayment. 

Income Source: A steady income source ensures that the customer will be capable of making the instalments on time. 

Financial Circumstances: Certain loans like student loans or home loans, offer terms that allow the borrower deferred payment during financial hardships like job loss or medical emergencies. 

Also Read: What is Personal Loan Repayment and Types of Loan Repayment Methods?

Conclusion

A deferred payment plan allows flexibility and convenience while making an expensive purchase like a car, mobile phone, online course and so forth. It eases the financial burden of the consumer by spreading the payments over a period of time. They often have no interest rate and payments are usually made after a grace period.

While this is an easy payment structure, it is important to understand the terms of payment and evaluate the purchase. It is advisable to consider this payment plan when one can repay the amount within the agreed-upon time without impacting their essential expenses.