What is deferred interest and is it worth it?

Deferred interest offers are similar to no-interest offers, providing financing without credit card interest charges for a promotional period. But they are unlike credit cards, in that the issuer keeps track of the interest from day one, and if you don’t pay off the entire balance by the end of the promotion, you’re charged all of the accumulated interest at once — even if you only owe a penny of the original amount.

Here’s what to know about deferred interest promotions before you say yes to an offer.

What is deferred interest?

Deferred interest offers are when you borrow money, and the interest you owe is delayed for a set period of time. Interest technically begins accruing from the original date of your purchase, though you won’t pay that interest if you pay off your balance within the promotional grace period.

If you can’t pay off your balance before the promo period ends, you face paying all of the interest that you deferred.

Compare that to a credit card’s 0 percent introductory APR offer, which charges interest only on your balance remaining at the end of the intro APR period.

How to tell if your offer or promotion is deferred interest

Deferred interest promotions often advertise with language like “no interest for nine months” or “no interest if paid in full.” It’s that stated time period or if paid in full that you want to pay attention to — a signal that if you can’t pay in full by the end of the promotion, you could be on the hook for retroactive interest on your purchase price from the day you signed the offer.

Store cards and co-branded cards — cards that typically limit rewards to a particular store or brand — are more likely to dangle deferred interest promotions than traditional credit cards. You might also be offered deferred interest financing offers when you shop for a big-ticket item like a refrigerator, computer or TV.

Another place that you can run into deferred interest financing is at your doctor’s office, which might offer a medical credit card to help you cover the cost of treatments or surgery. Between 2018 and 2020, consumers paid more than $1 billion in deferred interest after using medical credit cards and medical installment loans to cover health expenses, according to the Consumer Financial Protection Bureau.

Before signing a no-interest promotional offer, read the fine print to confirm whether it’s actually a deferred interest plan. Or sign in to your card’s online account for the terms of credit too. If you have any doubts, ask customer support to confirm the details of the offer.

How does deferred interest work?

Deferred interest loans and credit cards are standard at retailers that sell pricey products like appliances, electronics and furniture. Many businesses trot out these offers during the holidays, when consumers are looking for shopping bargains, featuring such marketing as “no interest for 12 months” or “same as cash.”

Deferred interest loans are enticing, because you can take your item home and not pay interest on your purchase for periods of six months to two years. But interest on that purchase begins accruing on the full balance from the day you sign the offer. To avoid paying that full interest charge, you must pay off your entire balance by the end of the offer period — and avoid any late payments.

Let’s say you need a new refrigerator. You can pay $1,800 upfront or take the store’s deferred interest offer advertising “no interest for 24 months” with a 25.99 percent regular APR. If you’re able to budget $75 each month over that 24 months, you should be able to repay the balance and avoid interest charges.

But what if life throws you a curveball — like a medical emergency or an unexpected loss of income — and you’re unable to repay the balance during the promotional term? In that case, you’d see an extra $900 or so added to your balance to cover the interest that accrued during the offer period. And if you continue carrying a balance from month to month after the promo period, you pay a high regular interest rate on the remaining amount until it’s paid off.

Stores and lenders offer these types of loans because they stand to make a lot of money on people who fall behind on payments. So before you say OK to an offer of deferred interest, make sure you can pay off the full amount before the offer expires.

Deferred interest vs. 0% APR

The key difference between 0 percent APR intro offers and deferred interest promotions is what the issuer does with the interest during and after the promotional period. While both options can potentially help you save money on interest fees, you’re likely to save more money — and peace of mind — with a 0 percent intro APR offer.

With 0 percent intro APR offers, the issuer doesn’t apply the regular interest rate to your balance until the no-interest period expires. Let’s say you charge $2,000 to a card with a 0 percent intro APR for the first 12 months. During the intro period, you’re able to pay $1,000 toward your balance. After the intro period ends, interest is applied only to the remaining $1,000 left on your balance.

In comparison, a deferred interest offer would require you to pay interest on that remaining $1,000 plus all of the interest accrued on the full $2,000 you borrowed retroactive to the date you initially agreed to the offer.

Pros and cons of deferred interest

While deferred interest offers can be a convenient way to make large purchases on a credit card, they come with some considerable downsides. As with any offer of credit, it’s wise to weigh the benefits and downsides of any deferred interest offer to see if it’s a good fit with your budget and financial goals.

How to avoid paying deferred interest

• Do the math. Figure out how much you should pay each month to cover the cost of the deferred interest offer before the no-interest period is over.
• Automate your payments. Set up automatic payments that post to your account before your monthly due date to avoid negating your offer with one late bill.
• Pay more than the minimum. If you purchase a big-ticket item with deferred interest, the minimum payment may not be enough to repay the balance in full before the promotional period ends.
• Consider an alternative. If you don’t want to risk paying high-interest rates once the promotional period ends, consider a personal loan or a card with a 0 percent introductory APR offer to cover the gap.

Is deferred interest worth it?

Deferred interest can be worth it if you’re needing to pay for an essential item and don’t have the cash on hand. Yet unless you’re confident that you can repay your full balance on time, these deferred interest promotional offers can backfire and cost you considerably.

Remember, if you’re late on a payment, or if you fall even one penny short of repaying your balance in full within the promotional period, you could be billed significant interest charges at rates as high as 25 percent or more.

Before taking on a deferred interest offer, weigh safer options — like a 0 percent APR credit card or a low-interest personal loan — that can help you avoid interest without the risk of a huge lump-sum interest payment if you run into financial trouble.

The bottom line

Deferred interest offers and credit cards are a good idea if you can budget to pay off the entire purchase amount before the introductory period ends. Read the fine print to avoid any surprises, and budget monthly payments high enough to cover your entire balance in the offer’s set time. Set up automatic payments and follow other strategic measures to stay on the right track — and avoid the shock of a lump-sum interest payment on your total purchase amount.