Deferred interest lets you use a credit card or loan to buy something today and delay interest charges for a set time. If you pay off your balance before the promotional period ends – it can be 12 months, 18 months or another time frame – you won’t owe interest. But if you fail to pay off the full amount by the end of the period, you will owe all of the accumulated interest.
A deferred-interest offer can be a good tool if you are making a large purchase, says Erika Safran, certified financial planner and founder of Safran Wealth Advisors in New York.
“This is perfect for the consumer who plans to pay off the loan within a year and creates a strategy to do so,” Safran says.
However, if you are not careful and fail to pay off your debt in time, deferred interest can turn into an expensive mistake.
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What Is Deferred Interest?
Deferred interest postpones the interest you have to pay on a purchase for a period of time. It is not the same thing as no interest.
Credit cards are typically associated with deferred-interest promotions. Retailers often offer deferred interest on big items such as appliances or furniture to make the purchases more affordable by spreading out the cost.
- A dental practice offering it on an expensive procedure.
- A retailer giving you no interest for 24 months to pay off a refrigerator.
- A mortgage lender excluding interest on a certain number of payments for a period of time.
One way to spot a deferred-interest offer is to pay close attention to language such as “same as cash” or “no interest for 12 months.” This typically indicates a deferred-interest promotion.
Does Your Credit Card Charge Deferred Interest?
Deferred-interest offers are common with retail store cards. You won’t owe interest as long as you pay off the card before the deferred financing period ends.
How Does Deferred Interest Work?
With deferred-interest financing, the interest on your purchase does not simply disappear. You won’t be charged interest during a set term, but you must pay off your purchase before the end of that term.
If you fail to pay off the entire debt by the end of the promotional period, you will owe all of the interest that has accumulated. The amount due is typically based on your original loan balance and not the remaining amount.
This means that if you borrowed $5,000 and paid off all but $500 by the deadline, you would owe interest on $5,000.
Should You Avoid Deferred Interest?
Deferred-interest offers are only a good idea if you can avoid paying interest. Sometimes the unexpected happens, and you can’t pay off your balance: You may have to prioritize a bigger expense, such as a car repair, or you may lose your job.
If you want to avoid getting hit with deferred interest, you can simply turn down deferred-interest offers. Or you have to follow through on the terms of your offer, including making your minimum payments on time.
Before you take a deferred-interest plan, make sure you can pay off the balance within the specified time frame. Calculate the monthly payments required to clear the balance before the promotional period ends, says Jordan Leaman, a Grand Rapids, Michigan, certified financial planner and mortgage wealth advisor with Churchill Mortgage.
If you are confident that you can afford the monthly payments, then you have good odds of averting interest charges. “Set up reminders to stay on track with payments and avoid missing deadlines,” Leaman says.
Deferred Interest vs. 0% APR
Deferred interest and 0% annual percentage rate offers might seem like the same thing, but they are different.
A 0% APR means you pay no interest on certain transactions – purchases, balance transfers or both – during a period of time. Your standard APR applies after the 0% APR period.
If you’re carrying a balance when your 0% APR expires, you will be charged interest only on the remaining balance and only going forward. With a deferred-interest offer, you will pay interest that has accrued since the day of the purchase.
As a result, the 0% APR offer is often a more attractive alternative. However, that doesn’t mean it comes without risks.
“Without a plan to pay off the card, the benefit of the zero rate will diminish when the loan interest jumps to the higher rate,” Safran says.
Does Deferred Interest Hurt Your Credit?
Deferred interest only will hurt your credit if you make late payments or miss payments, according to credit-reporting agency Experian. Not only could a late payment harm your credit, but some lenders also may end your deferral period early and charge you full interest. Avoid deferred-interest offers unless you are certain that you can make every payment on time and before interest kicks in.
Pros and Cons of Deferred Interest
- Save money. You won’t owe interest as long as you pay off your purchase by the end of the promotional period.
- Budget for a large purchase. You will be able to calculate how much you need to pay monthly to clear your balance before the deferred-interest period ends.
- Access convenient financing. Deferred interest is a potentially attractive option for “responsible borrowers with stable incomes and sound financial discipline,” Leaman says.
- Costly if you don’t pay off your balance before the offer ends. “One major drawback is that if the balance is not fully paid off by the end of the promotional period, all the accrued interest is retroactively applied,” Leaman says.
- Risky if you struggle with managing your debts or have unpredictable financial circumstances. Sometimes, even a single late payment will be enough to revoke your offer, and you will owe interest charges.
- Tricky to understand terms. The terms of deferred interest financing can be complex and lead to misunderstandings – and more debt than consumers had anticipated.
Is Deferred Interest Worth It?
Look for safer financing options before you go with a deferred-interest offer. Remember that if you’re late paying a bill or $1 short of clearing your balance, you will owe interest charges. This lump sum will likely be large because deferred-interest offers often come with high interest rates.
The problem is that even the best-laid plans can go awry: Unexpected life changes may mean that you can’t repay your balance on time. If you take a deferred-interest offer, go into it with eyes wide open, Leaman says.
“It is crucial to carefully read and understand the terms and conditions,” he says.
The key to lowering the potential risks of deferred-interest offers is to create a plan that allows you to pay off your obligation before the deferred-interest period ends. For example, if the deferred-interest period is 12 months, a common strategy is to divide the loan balance by 12. Make sure you can afford the payments before you accept the offer.
“Set up auto payments from your bank account,” Safran says. “After 12 months, the balance is paid off.”
The risks require that you carefully weigh whether deferred interest is the right option for you, Leaman says. “Consider alternative financing options with lower interest rates,” he says. “Or explore the possibility of paying in full upfront to avoid any potential pitfalls.”