You’ve probably seen deferred interest, often promoted with phrases such as “pay no interest,” offered online or in stores as a way to finance big-ticket items such as electronics and furniture.
These deferred interest periods allow shoppers to make a purchase and pay it off over time or may be offered as a promotion on a credit card. But unless you adhere carefully to the terms of these programs, you could quickly be looking at a bill well above what you were planning on paying.
Critics of deferred interest financing argue that it’s a deceptive lending practice. Though deferred interest offers are legal, the risks often outweigh any upsides so we at Forbes Advisor recommend avoiding such financing plans.
What Is Deferred Interest?
Deferred interest allows you to borrow money without paying interest right away. These offers typically have a set term, and if you pay off the amount of the loan within the term, interest will be waived. But if the full balance has not been paid off by the end of the promotional period, you will owe interest on the entire amount of the loan as accrued from the original purchase date.
How Does Deferred Interest Work?
Retailers use zero-interest financing offers to increase the marketability for items such as electronics, furniture or fitness equipment. Doctors, dentists and veterinarians have also been known to make no-interest financing offers for procedures performed under their care.
These offers may sound great, but if you are not familiar with the terms and conditions nor prepared to pay the full cost of the purchase in a specific time frame, they can be costly.
Deferred interest loans come with a specific term such as 12 or 24 months. During the agreed timeframe, you will not be charged interest if payments are made according to the terms of the agreement. If you do not pay off the loan in full by the end of the term, you will have to pay all of the interest you would have otherwise avoided. Some offers also revoke the deferred interest and charge you interest retroactively if you make a late payment within the no-interest time frame.
It’s crucial to know if you fail to pay off the loan during the set term, you’ll be charged interest on the entire amount—not only the remaining balance. And since these offers traditionally have high regular interest rates, facing such a charge could mean a lot of financial pain.
Deferred interest deals are commonly offered by retailers in partnership with a lender. Be aware that the lender makes money from these deals when people end up incurring interest charges.
Deferred Interest Credit Cards
Deferred interest credit cards have the same functionality as a deferred interest loan: You will not be charged interest on a purchase made with the card for the term of the promotional interest-free period, so long as you pay off the balance in full before the term ends.
Like a deferred interest loan, if you don’t pay off the balance by the end of the term, you will owe the entire amount of interest that would have accumulated on the original purchase amount.
You may encounter deferred interest offers on store credit cards, or cards limited to specific types of spending (such as medical or automotive expenses). Some aspects of deferred interest offers on credit cards may seem to run counter to sections of the CARD Act of 2009—specifically the double-cycle billing exclusion and the prohibition on retroactive interest rate increases. However, the Federal Reserve Board has explicitly authorized the issuance of deferred interest credit cards.
Forbes Advisor does not recommend you apply for a deferred interest credit card. These products generally come with high APRs and may trip consumers up because the minimum monthly payment might not be enough to pay off the balance in full before the promotional period ends. In other words, you might think you’re on track with your payments only to realize otherwise when facing a large interest charge. Instead, we recommend exploring credit cards with 0% introductory APR offers.
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Deferred Interest on Mortgages
Some mortgages also offer deferred interest, but they work differently than deferred interest promotions on a credit card. The technical term for this is negative amortization.
In short, deferred interest on a mortgage allows you to pay less interest per month than what you owe—but you still are required to pay the interest down the line. Therefore, monthly payments are reduced, but the loan amount can increase and take a longer time to pay off.
Deferred Interest vs. 0% APR
With a 0% APR offer, you will pay no interest on transactions such as purchases or balance transfers during the promotional period. No retroactive interest is charged if you have a balance left over, but once the introductory 0% APR period ends, the standard APR takes effect.
This means if you have a balance remaining when the promotional period expires, your credit card’s regular APR will apply. However, only the remaining balance will accrue interest, unlike a deferred interest promotion—which would assess interest on the entire purchase amount.
Does Deferred Interest Hurt Your Credit?
Using deferred interest financing won’t, in and of itself, impact your credit history and credit score differently than other financing products. As with any credit card or loan, if you pay late or miss payments the lender can report that to the credit bureaus and your score will suffer.
That said, if you don’t pay in full within the interest-free period, the interest you owe will be added to your balance. This could lead to a higher utilization rate, which could hurt your credit.
Pros and Cons of Deferred Interest
Pros of Deferred Interest
Deferred interest offers can allow you to purchase something without paying the full price upfront and avoid interest. If you follow the terms of the deal, it’s an affordable financing option.
Cons of Deferred Interest
You can never fully predict your financial future. Life happens, and if something prevents you from making your minimum monthly payments or paying off the loan by the end of the promotional interest-free period, you may have to pay more than you were expecting to.
Plus, if you don’t pay in full during the promotional period and end up incurring a large interest charge, the increased utilization could ding your credit score. And if you struggle to pay off what you owe, that could lead to late or missed payments, further damaging your credit—as well as increasing debt the longer you carry a balance and continue incurring interest. The complex nature of the terms of deferred interest financing can lead to misunderstandings and stick consumers in more debt than anticipated.
Bottom Line
When used correctly, deferred interest loans and credit cards act much like promotional 0% introductory APR periods. If you are diligent about staying up to date with your payments, you will be given the flexibility to pay off the loan over a period of time without accruing interest—but the consequences for mistakes with deferred interest are much higher than with 0% APR offers.
Because of the risk of unexpected and painfully high interest charges, we recommend avoiding deferred interest financing whenever possible. And, as is critical with any financing product, it is important to understand all terms of any offer thoroughly before borrowing.
