Learn more about deferred interest and how it works.
What Is Deferred Interest?
You often see these offers at stores that sell big-ticket items like furniture or electronics. You might see a sign that says there’s no interest if you pay in full within a certain timeframe. That’s a deferred interest offer. It’s deferred because you won’t be charged interest if you pay off the purchase within the timeframe. If you don’t pay off the balance or if you make multiple late payments, you could be charged all the accrued interest from when you first made the purchase.
How Deferred Interest Works
Deferred interest allows you to temporarily pay less interest than lenders typically charge. The offer is typically attached to a store card, which is where you charge the purchase. You can spot deferred interest when you see the term “same as cash” or “no interest loan for 12 months.” You’ll notice an influx of these offers around the winter holidays, as retailers entice buyers to spend extra on gifts and pay for them later. Online retailers and their branded credit cards also make these offers. Let’s say you want to buy a couch for $2,000. The furniture store offers no interest for 36 months if you use the store card to pay for it. You put your couch on the store card, which has a 22% APR. Your card may set your minimum payments to be enough to pay off the couch in 36 months, but you should do the math to confirm. $2,000 divided by 36 is $55.56, which means you should pay at least $56 per month to have it paid off at the 36-month mark, but you can (and should) pay it off sooner to have a cushion. If you pay it off on time, you essentially had an interest-free loan. If you miss a payment or two or pay less than $56 per month, you’ll miss the deadline. You’ll be charged the balance that’s left on the couch plus 36 months of accrued interest at 22%. Your no interest purchase now has a significant amount of interest.
The Dangers of Deferred-Interest Card Offers
An interest-free period is great when you completely pay off your purchase on time. But if you don’t, you can easily pay more than you would have paid with a different type of loan or credit card. Here are some of the dangers of deferred interest offers:
Retroactive charges: If you don’t pay off the entire balance before the deadline, you won’t just pay interest on the remaining balance; you pay interest backdated to the first day (and original amount) of your loan. Technicalities: If you don’t pay close attention to the fine print, you could easily forfeit an interest-free offer. One late payment, for example, and the arrangement could end, forcing you to pay all the interest you were planning to avoid. Things change: Life is never 100% predictable. All too often, unwelcome surprises force people to direct funds toward something else, potentially resulting in missed payments on the deferred interest loan. A CFPB study showed about 20% of all consumers fail to make the deadline. Among subprime borrowers, less than 50% of borrowers met the deadline and ended up paying deferred interest. High interest rates: These offers typically feature high interest rates (well above 20%) that kick in after the deferred interest period.
0% APR vs. Deferred Interest
A 0% APR offer is not the same as deferred interest. In the past, the terms were confusing, but federal law now makes deferred interest offers easier to spot. With a 0% APR, you won’t pay any interest for a while, and interest will only start accruing after the promotion ends. Lenders can no longer advertise deferred interest as “0% APR” offers. If you see “0% APR,” you’ll truly avoid interest during the promotional period. If you see terms like “same as cash,” “no interest until,” or “0% interest if paid in full by” a specified date, then you can expect deferred interest on the remaining balance after the end of the promotional period. Also, lenders must show you the exact date that the promotional period ends, and they should show the amount of deferred interest accrued.
How to Be Sure You Don’t Get Hit With Interest
When you buy furniture and finance it through a store, the deal is fairly straightforward—you must pay off the balance before the promotional period ends. With credit cards, things get more confusing because you might make a big purchase to take advantage of a no-interest offer, but you might also use the card for additional purchases. If you aren’t careful, this can backfire, but you can protect yourself by paying attention to a few key factors:
Multiple balances: Credit card companies keep your balances separate based on where the balance comes from. If you plan on using a card beyond the original, promotional purchase, pay close attention to how those balances are categorized and what the terms are on that debt. Where payments go: When you make payments, credit card companies are required to apply any payments above your minimum to the debt with the highest interest rate. The only exception is when you’re in the last two months of a deferred interest promotion; then the payments will apply to the promotional balance by default. This requirement is outlined in the 2009 CARD Act. You can ask your card issuer to apply extra payments to your deferred interest balance instead, but you won’t always be successful. Watch the end date: You know that there’s a deadline to pay off the debt, but sometimes that deadline doesn’t make sense. You might expect the deadline to fall on a monthly payment due date, but that isn’t always the case. Quirks like these may seem intentionally misleading, but it’s the borrower’s responsibility to learn them.
Is a Deferred-Interest Credit Card a Good Idea?
Deferred interest credit cards can be a good idea if they’re used responsibly. Make sure you know when the promotional period ends and how much you need to pay each month to pay off your loan before your deadline. If you’re not sure you’ll be able to keep up with payments, you might be better off using a different type of financing altogether, like a low-interest credit card or a personal loan. Run the numbers and choose what’s best.
