What is deferred interest and is it worth it?
Key takeaways
- With deferred interest offers, interest begins accruing immediately from the original purchase date, and if the balance is not paid in full by the end of the promotion period, the consumer is responsible for all accumulated interest.
- Deferred interest offers can be beneficial for making large purchases if the balance is paid off in full before the promotional period ends, but they can also be risky and result in high interest charges if the balance is not paid in time.
- Evaluate the advantages and disadvantages of deferred interest plans and explore alternatives, such as a 0 percent introductory APR credit card, before making your choice.
You may be familiar with the term, but still wondering — what does deferred interest mean, and can it help me? Deferred interest offers resemble the 0 percent introductory annual percentage rate (APR) offers typically seen from credit cards, which provide financing without accruing interest charges during a promotional period.
However, they differ from intro APR credit card offers in that deferred interest promotions begin accruing in the background immediately when you accept the offer. If you fail to pay off the entire balance by the end of the promotion period, you are liable for all accumulated interest, even if you only owe a penny of the initial amount. When a 0 percent introductory APR credit card offer period ends, you’re only charged interest on the remaining unpaid balance.
Before accepting a deferred interest promotion, here are some important points to consider:
What is deferred interest?
Deferred interest offers involve borrowing money with the interest owed being postponed, or deferred, for a specified period. Interest technically starts accumulating from the original purchase date, but you won’t pay it if you clear your balance within the promotional grace period.
However, if you’re unable to settle your balance before the promotional period concludes, you’ll be responsible for paying all the deferred interest that has accumulated over time.
Deferred interest vs. 0% APR
The main distinction between 0 percent APR introductory offers and deferred interest promotions lies in how the issuer handles the interest during and after the promotional period. While both options have the potential to reduce interest fees, opting for a 0 percent introductory APR offer typically results in greater savings and peace of mind.
With 0 percent introductory APR offers, the lender refrains from applying the regular interest rate to your balance until the no-interest period ends. For instance, if you charge $2,000 to a credit card with a 0 percent intro APR for the first 12 months and manage to pay $1,000 during this period, credit card interest will begin accruing only on the remaining $1,000 balance after the introductory period ends.
In contrast, a similar situation with a deferred interest offer would require you to pay interest on the remaining $1,000 balance — plus all the interest accrued on the entire $2,000 borrowed from the date you initially accepted the offer.
How does deferred interest work?
Retailers that specialize in selling expensive items such as appliances, electronics and furniture often offer deferred interest loans and credit cards as standard financing options. These offers are frequently rolled out during the holiday season when consumers are on the lookout for shopping deals, often advertised as “no interest for 12 months” or “same as cash” offers.
Deferred interest loans are appealing. They allow you to take your purchase home without incurring interest charges for a certain period, often ranging from six months to two years.
However, interest begins accruing on the entire balance from the day you accept the offer. To avoid paying the full interest amount, you must clear your entire balance by the end of the offer period and ensure no late payments are made. Setting up automatic payments can be a simple solution to ensuring your bills are paid on time.
Suppose you need a new refrigerator. You can either pay $1,800 upfront or opt for the store’s deferred interest offer, advertised as “no interest for 24 months” with a regular APR of 25.99 percent. If you can budget at least $75 each month over the 24-month period, you can repay the balance and avoid interest charges. However, if unforeseen circumstances arise, such as a medical emergency or unexpected loss of income, and you fail to repay the balance during the promotional term, you could end up with an additional $900 or more added to your balance to cover the accrued interest. Furthermore, if you continue carrying a balance after the promotional period ends, you’ll be subject to a high regular interest rate on the remaining amount until it’s fully paid off.
Stores and lenders offer these types of loans because they stand to profit significantly from individuals who fall behind on payments (or fail to understand the terms). Therefore, before accepting a deferred interest offer, ensure you can repay the full amount before the offer expires.
How to tell if your offer or promotion is deferred interest
Deferred interest promotions often use phrases like “no interest for nine months” or “no interest if paid in full.” It’s crucial to pay attention to the specified period or the condition of paying in full, as this indicates that if you fail to pay in full by the end of the promotion, you could be liable for retroactive interest on your purchase price from the date you accepted the offer.
Store cards and co-branded cards, which typically offer rewards limited to a specific store or brand, are more likely to feature deferred interest promotions than traditional credit cards. You may also encounter deferred interest financing offers when purchasing significant items such as a refrigerator, computer or TV.
Deferred interest financing may also be available at your doctor’s office, where you might be offered a medical credit card to assist in covering the costs of treatments or surgery. According to the Consumer Financial Protection Bureau, consumers paid over $1 billion in deferred interest between 2018 and 2020 after using medical credit cards and medical installment loans for health-related expenses.
Before accepting a no-interest promotional offer, it’s important to carefully review the fine print to determine if it’s actually a deferred interest plan. Alternatively, you can access the terms of credit through your card’s online account. If you have any doubts, seek confirmation of the offer details from customer support.
Pros and cons of deferred interest
Although deferred interest offers can provide a convenient method for making significant purchases, they also carry notable drawbacks. It is crucial you are fully aware of the deferred interest meaning before making any decisions. As with any credit offer, you must carefully consider the advantages and disadvantages to determine if it aligns with your budget and financial objectives.
Pros
- Potential savings. If you pay off your entire balance during the promotional period, you won’t owe any interest on your purchase. This is a rare opportunity to eliminate interest charges entirely, but only if you are confident in your ability to pay off the entire balance before the promotional period ends.
- Easier qualification. These offers may be more accessible to qualify for than many credit cards, particularly if you have poor or fair credit and need to finance essential big-ticket items such as an air conditioner or refrigerator, provided you can repay the balance on time.
Cons
- High interest rates. Deferred interest offers often come with interest rates significantly higher than average credit card rates, typically ranging from 25 percent to 32 percent on the entire initial balance, compared to the current average credit card interest rate of just over 20 percent.
- Retroactive interest charges. Failing to repay the entire balance before the promotional period concludes results in interest charges on the total original purchase price, retroactive to the transaction date.
- Fine print. Terms and conditions for deferred interest offers vary by issuer or lender, and certain actions like late payments may invalidate the deferred interest offer. It’s crucial to thoroughly review the terms and conditions of any offer before agreeing to it. By carefully reviewing the fine print, you may discover that the promotional offer terminates if you fail to make a monthly payment. In such a scenario, you will likely be required to cover all the accumulated interest that has accrued. Additionally, your already high interest rate may increase further.
How to avoid paying deferred interest
If you’re going the deferred interest route, keep the following tips in mind:
- Perform the calculations. Determine the monthly payment required to cover the deferred interest offer’s cost before the no-interest period expires.
- Exceed the minimum payment. If you make a significant purchase with deferred interest, be aware that the minimum payment required by the lender may not suffice to fully repay the balance before the promotional period concludes. It’s up to you to determine how much you need to pay each month to fully pay off your balance in time.
- Set up automated payments. Establish automatic payments that are credited to your account before your monthly due date to prevent nullifying your offer with a single late payment.
- Explore alternatives. If you are hesitant about accruing deferred interest once the promotional period ends, consider opting for a personal loan or a card featuring a 0 percent introductory APR offer to bridge the gap.
Is deferred interest worth it?
Deferred interest may be beneficial if you require financing for an essential item and lack immediate cash. However, unless you are confident in your ability to settle the entire balance on schedule, these deferred interest promotional offers can pose a risk and lead to substantial costs.
Keep in mind that even a single late payment or falling short by just a penny in repaying your balance in full within the promotional period could result in significant deferred interest charges, often accrued at rates exceeding 25 percent.
For peace of mind, clarify the duration of the promotional period and the subsequent interest rate once it expires. Similarly, consider planning to repay your debt a few months ahead of schedule so you won’t be caught off guard when the promotional period ends.
As you make progress in paying off deferred interest, periodically review your balance as you approach the end of the term. If you’re concerned about miscalculations or uncertain about your ability to clear the remaining balance before interest accrues, you can adjust your payments accordingly.
The bottom line
Taking advantage of deferred interest offers can be beneficial if you can manage to pay off the full purchase amount before the introductory period expires. It’s essential to carefully review the terms and conditions to prevent any surprises and plan monthly payments at a level that ensures your entire balance is covered within the specified timeframe of the offer.
Implementing automatic payments and other strategic measures can help you stay on course and prevent the unexpected burden of a lump-sum interest payment on your total purchase amount.
Lastly, remember that, despite not owing interest, you’re still borrowing money and accruing debt that requires repayment. Phrases like “no interest” may create the illusion of free money, but in reality, it must still be repaid at a later time.
