What Is Deferred Interest?
6 Min Read | Last updated: September 13, 2024
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Deferred interest offers can help you finance a big-ticket purchase interest-free – but only if you pay off the balance in full before the promo period ends.
At-A-Glance
- If used wisely, a deferred interest offer might help you finance big-ticket purchases.
- In a deferred interest deal, there’s a promotional period during which you don’t have to pay interest – but interest still accrues on the loan during that time.
- To avoid being charged all accrued interest, you must pay off the balance in full before the promo period expires.
If you ever come across a personal financing arrangement that offers “deferred interest,” take care not to confuse it with a “no interest” offer, such as a credit card with a 0% intro Annual Percentage Rate (APR) promotion. While deferred interest offers can attract consumers looking to finance a large purchase, they might prove costly if balances are not fully paid in a timely way. Understanding what deferred interest is, how it works, and how it’s calculated may help you make the right financing decision for your needs.
What Is Deferred Interest?
Deferred interest is an arrangement that effectively allows you to finance a purchase without paying any interest – as long as you pay off the balance in full before the promotional deferment period ends.1 Deferred interest may seem a lot like “no interest” or 0% intro APR offers, but there’s a crucial difference that might make it a more expensive financing option: Interest accrues over the life of the plan, but paying that interest is “deferred” until the promo period expires.
Deferred interest deals are typically offered for promotional purposes by retailers, often for big-ticket items such as home furnishings and personal computers.1 But they pop up in other situations, as well. There are deferred-interest credit cards, for example, and you may even be on the hook for paying accrued interest for certain types of student loans in deferment.1,2,3
How Does Deferred Interest Work?
Normally, when you borrow money, you pay interest on the loan from the start. Or, in the case of a credit card, from the end of the interest-free period – be it an introductory 0% APR offer or the interest-free grace period between your statement closing date and your payment due date.2
With deferred interest offers, interest accrues on the loan from the onset. But there is a promotional period during which you don’t pay any of that interest. Typically, if you pay off the loan in full by the end of the promotional period, you won’t have to pay the interest that has accrued. But if you have an outstanding balance at the end of that period, however small, then the total amount of the “deferred interest” accrued during the promotional period is added on to the loan.1,2
Deferred Interest Example
Here’s an example to show how deferred interest should work in practice:
Imagine you’ve seen a sofa that would be ideal for your lounge. The ticket price is $2,000, but there’s a finance deal that means you can pay a deposit of $500 and borrow the rest at an APR of 25%, with no interest to pay if you pay off the remaining $1,500 balance, in full, within two years.
You decide to make monthly payments of $62.50. If you maintain these payments for two years, you’ll have cleared your balance by the end of the promotional period and there’ll be no interest to pay ($62.50 x 24 months = $1,500).
But suppose you have a sudden unexpected expense – maybe the water heater broke down or you had a medical emergency – that forces you to pause your payments for two months. At the end of the promotional period, you’ll have an outstanding balance of $125.
Since you haven’t cleared your balance by the end of the promotional period, all the interest that you would have paid if there hadn’t been a promotional period will be added to your outstanding balance.1 And, going forward, you’ll pay interest at 25% APR on your balance. This means that by the time you’ve paid off the new balance and the interest charged on it, you’ll have paid far more for that sofa than its original ticket price.
The Difference Between Deferred Interest and “No Interest” Finance Deals
When considering a deferred interest arrangement, it’s worth paying careful attention to the terms of the deal. If it’s a “no interest” deal, there may be two discrete interest rates: a 0% APR during the promotional period and a higher APR thereafter. Other buy now, pay later options might have a low, flat APR for the life of the payment plan. On a deferred interest deal, however, there will usually only be one interest rate, and that rate might be quite high. It’s important to consider the fine print. For example, if the deal is advertised as “no interest to pay for two years,” but doesn’t say the interest rate is 0% APR for two years, it’s likely a deferred interest deal.
Why does this matter? Well, as we’ve already noted, a deferred interest deal may end up working out to be quite expensive if you can’t pay back the full amount of the loan within the promotional period, because all of the interest accrued during the promotional period will then be added to the loan. But in a “no interest” deal, there’s no accrued interest to add.
So, if the above example were a no interest deal, you would pay interest at 25% APR on your outstanding balance of $125, instead of 25% APR on the $125 plus all the interest accrued over two years, as would happen with a deferred interest loan. Ultimately, with the no interest plan, you’d pay more for your sofa than its ticket price, but not nearly as much as you would with a deferred interest deal that overran its promotional period.
Pros and Cons of Deferred Interest
A deferred interest deal has the potential to be a cost-effective way to finance big-ticket purchases if you are certain that you will be able to pay off the loan. If you have a stable income, or some “rainy day” savings, and would rather spread out payments over time instead of paying the total in one lump sum, a deferred interest deal may be worth considering.
However, a deferred interest deal could leave you on the hook for a lot of money if you don’t clear the balance in full and on time. Remember, APRs on deferred interest financing might end up being very high. It’s also important to beware of any fine-print clauses that void the promotional period if you miss a payment or pay late. So, if your income is uncertain and you lack “rainy day” savings, a deferred interest deal may not be the best choice for you. If the purchase is vital and you don’t have savings tucked away, a no interest offer – or even a 0% intro APR credit card – may be a better fit.2
Making the Best of Deferred Interest Deals
If you do opt for a deferred interest deal, it’s worth taking steps to ensure that you don’t have to pay the interest. For example:
- Set up monthly automatic payments of a sufficient size to pay off the balance in full within the promotional period.
- Consider paying more than the minimum, so that you clear the loan more quickly than the span of the promotional period.
- Look for other ways of clearing any outstanding balance at the end of the period – for example, refinancing it with a 0% intro APR credit card or a conventional bank loan.
The Takeaway
Deferred interest deals are widely available and most of the time should be easy to obtain, so it’s tempting to use them for large consumer purchases. But it’s important to take steps to avoid paying the interest on them, as this could potentially become very expensive. When taking out a deferred interest loan or credit card, it’s wise to have contingency plans to ensure that the loan will be paid off within the promotional period, and always check the small print.
1 “I got a credit card promising no interest for a purchase if I pay in full within 12 months. How does this work?,” Consumer Financial Protection Bureau
2 “What Is Deferred Interest?,” Experian
3 “Student Loan Deferment,” Federal Student Aid
Frances Coppola spent 17 years in the financial services industry before becoming a noted writer and speaker on banking, finance, and economics. Her work appears in the Financial Times, Forbes, and a range of financial industry and other publications.
All Credit Intel content is written by freelance authors and commissioned and paid for by American Express.
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