What is deferred interest and is it worth it?

Retailers that specialize in selling expensive items such as appliances, electronics and furniture often have deferred interest loans and credit cards with deferred interest offers as standard financing options. These offers may seem appealing. You can often see them during the holiday season when people are on the lookout for shopping deals. Advertisements promise “no interest for 12 months” or “same as cash” offers.

That’s not entirely true.

Deferred interest offers are stealthy. You might think you’re getting a 0% APR period, when in reality, interest keeps accumulating even though you don’t see APR charges on your bill. If you don’t pay off the entire balance within the promotional period, you’ll be charged all that accrued interest. And if you’ve only been making minimum payments, that’ll likely be the case.

Here’s what you should know about deferred interest beforehand…

How does deferred interest work?

For a specified period, deferred interest offers to postpone, or defer, the interest owed on borrowed money.

Deferred interest offers are similar to the 0% introductory annual percentage rate (APR) offers typically seen on credit cards, which provide financing without accruing interest charges during a promotional period. However, deferred interest promotions are different in some key — and sometimes costly — ways.

With a deferred interest promo, interest begins to accumulate from the date of purchase, but you won’t be liable for it if you clear your balance within the promotional grace period (usually six to 24 months). But if you’re unable to settle your balance before the promotional period ends, you’ll be responsible for paying all the deferred interest that has accrued over time — even if you owe only a penny of the initial amount.

That’s why you’re better off with a true 0% APR offer if you’re looking for more time to pay down a large transaction. With a 0% intro APR credit card, interest doesn’t accrue during the promotional period. And if you don’t pay down your balance by the time that period ends, you’ll only be on the hook for interest charges on the remaining balance at the credit card’s regular purchase APR.

Is deferred interest worth it?

Deferred interest is rarely a good idea.

Unless you’re absolutely 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.

Another tricky part to consider is the payment amount. Without looking closely, you might assume making minimum payments should be enough to pay off the full balance by the promo end date. Typically, it’s not. You’ll need to plan making bigger payments to fully pay off the purchase before the deferred interest period expires.

If you do end up taking this type of offer, 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.

How to tell if your offer or promotion is deferred interest

Deferred interest promotions are often tricky to spot. Here are some tips to help you tell whether you’re being offered one:

• Check for certain phrases like “no interest for nine months” or “no interest if paid in full”. It’s crucial to pay close attention to the specified period or the condition of paying in full, as failing to pay in full by the end of the promotion could make you liable for retroactive interest on your purchase price from the date you accepted the offer.
• Pay special attention to store cards. 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.
• Look at the fine print when financing a large purchase. You may also encounter deferred interest financing offers when purchasing significant items such as a refrigerator, computer or TV.
• Be wary of medical card offers. Deferred interest financing may also be available at your doctor’s office, where you might be offered a medical credit card to help cover the costs of treatments or surgery.

Tips to manage your deferred interest promotion

If you already took on a deferred interest offer, you should handle it with care to avoid exorbitant interest costs. Here’s what you can do:

• Run the numbers. Determine the monthly payment required to cover the deferred interest offer’s cost before the no-interest period expires. For example, imagine you received a 12-month, 0% deferred interest promotional rate on a $2,000 purchase. Regardless of what the minimum monthly payment is on your account, you’ll need to pay at least $167 per month to pay off your balance before the promotional period expires.
• Exceed the minimum payment. If you’ve made 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 on time.
• Don’t add other balances to your card. If your deferred interest promotion comes in the form of a credit card, don’t carry other balances on that card. If you already are, contact your card issuer and let them know you want any excess payments above the minimum to be applied to your deferred interest balance.
• 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.
• Get a balance transfer card. If you can’t pay off your deferred interest offer during the promotional period, consider applying for a balance transfer card and transferring your deferred interest card balance to a new card. Doing so will give you more time to pay the remaining balance without accruing interest during the introductory APR period — but don’t forget to take any balance transfer fees into account before you commit.

The bottom line

Most of the time, deferred interest isn’t the best move. These promotions are designed to appear as 0% APR offers, but they aren’t. The minimum payments usually aren’t enough to pay off the balance before the promo ends, and once it does, you’re on the hook for the interest on the entire balance retroactively. Needless to say, such a deal can become expensive fast.

Instead, consider getting a 0% intro APR credit card. With this type of card, interest on purchases doesn’t accrue for a specified period — and it won’t come back to haunt you if you don’t pay off the balance before the promotion ends.