What is a Deferred Payment?
Definition: A deferred payment in the traditional sense refers to a situation where a debt outstanding payment is pushed back further from the date in which the creditor was to initially receive payment. Often times a deferred payment is usually characterized by an agreement to repay the sum in question in installments.
How Do Deferred Payments Work?t
As noted earlier, a deferred payment usually involves an agreement between two parties, the borrower and the creditor. The two parties come to an agreement that allows the creditor to receive goods upfront without having to make any payment first. The debtor makes the payment at a later date after receiving the goods as part of the agreement with the creditor.
However, the term deferred payments is widely used in different segments or the business world or different industries. Often times they are used in retail purchases but can even be used in major purchases.
Deferred Payment Examples
Deferred Car Loan Payments
Deferred payments are a common practice for most people during their car loan journey. Picture a situation where you borrow a loan to purchase a car but something comes up along the way, resulting in your inability to make a payment. In such an instance you may have the option to go through the differed payment option. Such a situation may occur due to emergencies such as job loss or emergency medical expenses, among other things. In this case, the debtor can defer their payment but continue the payment later instead of defaulting.
If you wish to defer your car loan payment, the first thing you should do is to consult your lender on the matter so that you are both on the same page regarding your intentions. Most lenders allow this type of flexibility as long as lenders are still able and willing to go through with the payments.
Deferred Mortgage Payments
Mortgages usually attract interest which the mortgage holder pays as part of the monthly premiums. Sometimes the mortgage holder might not be able to pay the entire interest and so it is deferred and still be counted until you clear the loan and the interest.
Note that the deferred amount can be paid off in bulk at the borrower’s convenience. This might come in handy in a situation where the mortgage holder needs time for something like an impending deal that will yield good returns which can then be used for the mortgage payment.
What is a Deferred Letter of Credit?
This refers to a type of letter that is used by the borrower to secure credit from a bank which he then uses to make payment to a seller. The letter of credit is provided as an assurance of transactions between the buyer and seller.
Once the bank is satisfied with the documentation, it then releases the payment to the seller and then the buyer becomes the bank’s debtor.
What is Deferred Tax Liability?
A deferred tax liability refers to a tax that is owed by the debtor for a particular period of time for which the debtor is yet to pay. Think of it as tax payment that is pushed back which means that a company or business owes the tax to the corresponding tax authority.
The deferred tax liability indicates the existence of an outstanding tax. A company may opt not to pay a tax obligation for a specific duration of time especially when it is going through a cash crunch so that it can take advantage of available opportunities. It can then clear the tax liability sometime down the road.
How are deferred long-term liabilities handled in the accounting books?
Deferred long-term liabilities are considered as long-term debt obligations and so they are usually recorded as losses in the income statement until they are cleared.
They are also included in balance sheets as line items. This means that they are significant enough to affect the operations of a business, especially to the lender. The borrower also considers them as liabilities which have to be dealt with in the future.
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