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.
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. But you may not fully understand how it works, the pros and cons or how to use it to your advantage.
These tips can help you decode the finer points of deferred interest financing and whether it’s something you should consider.
See related: Best 0% APR credit cards
An eight-step guide to deferred interest
- What is deferred interest?
- How deferred interest works
- Deferred interest versus 0% APR credit card offers
- How to tell when a promotional offer involves deferred interest
- What are the pros of deferred interest offers?
- What are the cons of deferred interest offers?
- How to make deferred interest offers work for you
- Alternatives to deferred interest offers
What is deferred interest?
Deferred interest isn’t complicated. It simply means deferring interest payments on financing to a later date. If you open a new store credit card, for example, you may be offered a deferred financing promotion on your initial purchase.
“It allows you to pay for something with the credit card 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 is promotional financing that 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, and when you have to pay interest depends on the terms of your financing.
“Essentially, you’re only making payments toward your principal balance for a limited time until you’re required to pay all the interest accrued at once,” says Xavier Epps, founder and CEO of XNE Financial Advising.
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 accumulate on the original purchase amount.
If you don’t pay the card’s balance in full by the end of the promotional period, you will have to pay all the interest accumulated since the purchase date.
Deferred interest vs. 0% APR credit card offers
You may equate deferred interest financing with 0% APR credit card promotions, but they’re not the same.
“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.
Epps says the best way to avoid paying interest is to pay off the balance before the deferred interest period ends. Otherwise, deferred interest could end up costing you money instead of saving it — and potentially a lot of it.
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. Specifically, you should understand:
- 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.”
“If you’re aware of all the specifics of deferred interest financing, it can be beneficial,” says Nathan Wade, managing editor for 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.
“The advantage of deferred interest is being able to make large or emergency purchases without having to pay interest,” says Epps.
That might be a more attractive option than charging it to a credit card with a high interest rate or taking out a 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.
“The disadvantage is that once the deferred interest period ends, you typically face high interest rates,” says Epps.
Using the Amazon Store Card and Prime Store Card as examples once again, the standard interest rate for purchases is 27.49%. That’s over 10% higher than the average credit card APR of 17.30%.
If you charged a purchase in the thousands, such as new furniture or appliances, an APR that high could increase the total cost exponentially.
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. 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.
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 15 billing cycles, then a variable APR of 15.49%-25.49% applies.
- BankAmericard® credit card: 0% introductory APR on purchases for the first 18 billing cycles, then a variable APR of 14.49%-24.49% applies.
- Chase Freedom Unlimited: 0% introductory APR on purchases for the first 15 months, then a variable APR of 16.49%-25.24% 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.