In the retail sector, deferred interest plans are often advertised as charging “no interest until” a certain date. After that date, however, the interest that has been accruing since the purchase date is charged to the account. Read on to learn more about how deferred interest works.
Deferred interest is something you may have been offered if you’ve ever used a store credit card or retail store financing to make a large purchase. These promotions allow you to postpone paying interest on loans or lines of credit for a set time period.
That could save you money but deferred interest financing can prove expensive if you’re unclear on how it works. These tips can help you decode the finer points of deferred interest, including the pros, cons and how to use it to your advantage.
See related: ‘Buy now, pay later’ explodes in popularity
What is deferred interest?Deferred interest is essentially what it sounds like. It’s a type of financing in which you’re able to defer making interest payments to a later date.
Retailers that offer in-store financing or store credit cards can use deferred financing promotions to attract new customers. So for example, if you’re buying new living room furniture the store might offer deferred interest financing for 24 months.
“It allows you to pay for something using credit with what appears to be no interest or a 0% interest rate, meaning that when you make payments on your purchase, your entire monthly payment is going to the balance on the card or loan,” says Deacon Hayes, founder and owner of Well Kept Wallet.
Deferred interest financing allows you to buy now and pay later without incurring interest charges right away. Amazon, for example, offers special financing of this nature to Amazon Prime Store Card members.
See related: Retail store credit cards: Are they worth it?
How deferred interest works
Deferred interest doesn’t mean interest-free; you’re simply delaying the payments on interest. When you have to pay interest depends on the terms of your financing. For example, your deferred interest period may be as short as six months or stretch up to 18 or 24 months. During that time, you wouldn’t be required to pay interest, but interest would still accrue on the original purchase amount.
If you don’t pay the balance owed in full by the end of the promotional period, you will have to pay all the interest that’s accumulated since the purchase date. That could prove costly if you made a larger purchase using deferred interest financing that carries a steep APR.
Deferred interest vs. 0% APR credit card offers
Deferred interest financing and 0% APR credit card promotions may seem the same, but they’re not identical.
“The difference between deferred interest and a 0% APR on a credit card is that with the credit card, when the introductory 0% interest period ends you won’t [accumulate] back interest from the time of the initial purchase,” says Hayes.
Instead, you’d only pay interest on any remaining balance due on the card. With deferred interest, any interest owed would be based on the entire purchase amount, regardless of how much of that you paid down before the promotional period ended.
“It’s still accruing interest in the background, so to speak, and if you don’t have the balance paid in full on or before the deferred interest period expires, you’ll end up paying all the interest that accrued from the time you first made the purchase,” says Hayes.
That’s one good reason to think twice about using a deferred interest option. And if you do, make sure to pay off the balance before the deferred interest period ends.
How to tell when a promotional offer involves deferred interest
The easiest way to tell if you’re signing up for a deferred interest plan is to read the fine print outlined in the financing agreement. Specifically, look for wording related to:
- How interest accrues
- The rate at which interest accrues
- The regular purchase APR
- When the final cutoff date is for paying the balance in full to avoid interest charges
The Amazon Store card’s fine print, for example, includes the following language to explain how the card’s special financing offers, which come with deferred interest, work: “Interest will be charged to your Amazon Store Card account from the purchase date if the promotional balance is not paid in full within 6, 12 or 24 months respectively.”
The fine print goes on to say that to avoid interest with special financing you would need to: “Pay the entire promotional balance in full before the end of the offer period to avoid interest on your purchase.”
If the financing is truly 0%, then the cardmember agreement would use different wording. For example, the Discover it Cash Back card includes this language in its rates and terms: “Annual Percentage Rate (APR) for Purchases: 0% intro APR for 14 months from date of account opening. After the intro APR expires, your APR will be 11.99% to 22.99% based on your creditworthiness.”
It’s important to understand those differences so you know what you could end up paying for interest.
“If you’re aware of all the specifics of deferred interest financing, it can be beneficial,” says Nathan Wade, director of marketing at WealthFit Investing. “However, if you’re not well-versed, there is a chance you’ll pay more than you intended.”
What are the pros of deferred interest offers?
Deferred interest can make financing purchases more convenient and manageable, from a budgeting perspective because you won’t have to pay interest right away. That might be a more attractive option than charging it to a credit card with a high regular variable APR for purchases or taking out a personal loan with interest.
Say your heating and air system conks out in the middle of winter, for example. The HVAC company may offer deferred interest financing, which would allow you to cover the $5,000 needed to replace it. If you’re able to budget and pay off the balance on schedule, the purchase would effectively be interest-free.
“You’re not liable for the interest accrued as long as you pay it before the expiration date,” says Wade.
What are the cons of deferred interest offers?
The trade-off that comes with using deferred interest is what can happen if you don’t pay off the balance in time.
Using the Amazon Store Card and Prime Store Card as examples once again, the standard interest rate for purchases is 25.99%. That’s considerably higher than the average credit card APR of 16.12%.
If you charged a purchase in the thousands, such as new furniture or appliances, an APR that high could increase the total cost exponentially.
Using deferred interest financing offers could be particularly problematic if your income took a hit because of the coronavirus pandemic. A lower household income could make it more difficult to pay off a deferred interest promotion before interest begins accruing. And if your credit score has also dropped, you could be facing a steeper APR. That means more interest you’ll have to pay back if you aren’t able to pay in full by the cutoff date.
See related: How does credit card interest work?
How to make deferred interest offers work for you
If you’re thinking of using deferred interest financing, having a plan is the best way to use it to your advantage. That starts with examining your budget to see what you can realistically afford to pay each month.
“You’ll likely have to pay more than the stated minimum payment in order to be able to pay off the entire balance without being charged deferred interest,” says Hayes.
Say, for example, that you make a $1,200 purchase with deferred interest for 12 months. Your monthly minimum payment may be $25, but you’d need to pay at least $100 per month to zero out the balance to avoid interest charges.
You’d want to make sure you could pay the balance in full before making the purchase to avoid any interest snafus. Again, consider carefully how any pandemic-related income changes might affect your ability to do so.
It may also be wise to scout out options for 0% balance transfer promotions just in case you need to shift the remaining balance elsewhere if you can’t pay in full. Keep in mind that 0% offers may be more difficult to come by if you don’t have excellent credit, as some card issuers have pulled back on balance transfer promotions because of the pandemic.
Alternatives to deferred interest offers
Hayes says if you’re not sold on the idea of deferred interest, a credit card with a 0% introductory APR on purchases is the next best choice.
There are numerous cards that offer generous 0% APR introductory periods, including:
- Discover it® Cash Back: 0% introductory APR on purchases for the first 14 months, then a variable APR of 11.99%-22.99% applies.
- Bank of America® Cash Rewards credit card: 0% introductory APR on purchases for the first 12 billing cycles, then a variable APR of 13.99%-23.99% applies.
- BankAmericard® credit card: 0% introductory APR on purchases for the first 12 billing cycles, then a variable APR of 12.99%-22.99% applies.
- Chase Freedom Unlimited: 0% introductory APR on purchases for the first 15 months, then a variable APR of 14.99%-23.74% applies.
The advantage of using a card with an introductory 0% APR on purchases is twofold. First, you would only be subject to interest charges on the remaining balance, not the original balance, if you don’t pay in full before the promotional period expires.
Second, you could earn rewards on the purchase if you choose a cash back credit card. Those rewards could be applied as a statement credit or cash back that you could use to pay the bill, reducing the amount you have to repay out of pocket.
When comparing 0% introductory APR cards, consider the rewards structure along with the annual fee. And of course, pay attention to the regular variable APR for purchases once the promotional period ends just in case you’re not able to pay off the balance in time.