What Is Deferred Interest And Is It Worth It?

You may be familiar with the term, but you might still wonder: what does deferred interest mean, and can it help me? Deferred interest offers are similar to the 0 percent introductory annual percentage rate (APR) offers typically seen from 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. Before accepting a deferred interest promotion, here are some important points to consider:

What is deferred interest?

For a specified period, deferred interest offers postpone, or defer, the interest owed on borrowed money. Despite the fact that interest begins to accumulate from the date of purchase, you won’t be liable for it if you clear your balance within the promotional grace period.

However, 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.

How does deferred interest work?

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 are frequently promoted during the holiday season when consumers are on the lookout for shopping deals, often advertised as “no interest for 12 months” or “same as cash” offers.

Deferred interest loans are appealing. They allow you to take your purchase home without incurring interest charges for a certain period, typically ranging from six months to two years.

But, because interest begins to accrue on the entire balance from the day you accept the offer, you must clear your entire balance by the end of the offer period to avoid paying the full interest amount. This also means making sure that no late payments are made.

Deferred interest vs. 0% APR

The main distinction between 0 percent APR introductory offers and deferred interest promotions is how the issuer manages interest during and after the promotional period. While both options can help minimize interest fees, choosing a 0 percent introductory APR offer typically results in greater savings and peace of mind.

With 0 percent introductory APR offers, the lender refrains from applying the regular interest rate to your balance until the no-interest period ends. For example, if you charge $2,000 on a credit card with a 0 percent intro APR for the first 12 months and pay off $1,000 during this period, credit card interest will begin accruing only on the remaining $1,000 balance after the introductory period ends.

In contrast, a similar situation involving a deferred interest offer would require you to pay interest on the remaining $1,000 balance — plus all the interest accrued on the entire $2,000 borrowed from the date you initially accepted the offer.

Deferred interest example

Suppose you need a new refrigerator. You have two options: pay $1,800 upfront or take advantage of the store’s deferred interest offer, advertised as “no interest for 24 months” with a regular APR of 25.99 percent. If you can budget at least $75 each month over the 24-month period, you can repay the balance and avoid interest charges. However, if unforeseen circumstances arise, such as a medical emergency or an unexpected loss of income, and you fail to repay the balance during the promotional term, you could incur an additional $900 or more in accrued interest added to your balance.

If you continue to carry a balance after the promotional period ends, you’ll be subject to a high regular interest rate on the remaining amount until it’s fully paid off.

Stores and lenders offer these types of loans because they can profit significantly from individuals who fall behind on payments (or fail to understand the terms). Therefore, before accepting a deferred interest offer, make sure you can repay the full amount before the offer expires.

How to tell if your offer or promotion is deferred interest

Deferred interest promotions can sometimes be 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 offer 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. Consumers paid over $1 billion in deferred interest between 2018 and 2020 after using medical credit cards and medical installment loans for health-related expenses, according to the Consumer Financial Protection Bureau.

Before accepting a no-interest promotional offer, it’s important to carefully review the fine print to determine if it’s actually a deferred interest plan. Alternatively, you can access the terms of credit through your card’s online account.

Pros and cons of deferred interest

Although deferred interest offers can provide a convenient method for making significant purchases, they also carry notable drawbacks. As with any credit offer, you must carefully consider the advantages and disadvantages to determine if it aligns with your budget and financial objectives.

Pros of deferred interest

A deferred interest offer can have several advantages when leveraged properly. Here are the main benefits to consider:,

• It allows you to make purchases without needing to pay the full amount upfront: This can be particularly helpful for larger expenses, as it provides the option to spread out payments over time. By deferring the interest, you have more time to manage your finances and budget for the purchase.
• It offers flexibility in terms of payment schedules: You can enjoy the convenience of making smaller, manageable payments over the deferral period, rather than being burdened with a lump-sum payment. This can be especially helpful if you’re facing temporary financial constraints or unexpected expenses.
• Many credit cards and retail financing options offer deferred interest as a promotional incentive: These promotional offers often come with a specified period, such as 6 months or a year, and might not be available all of the time. Taking advantage of a limited-time deferred interest offer can provide significant savings if you’re able to pay off the full balance within the promotional period.
• It could be easier to get one of these offers as opposed to an intro APR offer. These offers may be more accessible to qualify for than many credit cards, particularly if you have poor or fair credit and need to finance essential big-ticket items such as an air conditioner or refrigerator, provided you can repay the balance on time.

Deferred interest can be a useful financial tool if you’re looking to make purchases without immediately paying the full amount or incurring interest charges. When used responsibly and with a clear understanding of the terms and conditions, deferred interest can offer convenience, flexibility and potential cost savings.

Cons of deferred interest

In most cases, deferred interest offers should be avoided, even if they might sound like a good deal upfront. Here’s why:

• These offers come with tremendous risk: For example, you may sign up for one of these offers based on the assumption that you will pay off the entire balance before the promotional “no interest” period ends. However, deferred interest offers usually come with dangerous pitfalls that may not be obvious at first glance. The deal will likely offer something like “no interest if paid in full within 12 months.” That’s a big “if” though, and that’s where the lender can cash in.
• These offers often come with high interest rates. Deferred interest offers often come with interest rates significantly higher than average credit card rates, typically ranging from 25 percent to 32 percent on the entire initial balance, compared to the current average credit card interest rate of just over 20 percent.
• They could become void after a single missed payment: If you read the offer’s fine print, you may also find that the promotional offer ends if you miss a monthly payment. Again, this will almost certainly put you on the hook to pay all the accrued interest that has built up. Additionally, the high interest rate charged under most of these offers would likely go even higher because of your missed payment. You can search for “penalty APR” in your terms and conditions to see if this is the case.
• Your payments might not go toward your deferred interest offer if you’re carrying other debt on your card: Carrying other balances, such as purchases or cash advances on your credit card, is also a bad idea. When you have other balances, payments you make above your minimum payment are not necessarily applied to your deferred interest balance. So, if you paid more than the minimum payment amount thinking you would pay down the deferred interest, you might be surprised to find that your lender didn’t allocate your funds that way. You’d have to talk to your lender to ensure that your excess payments are applied to your deferred interest balance specifically. This extra step can interfere with your plans and hinder your ability to pay off your balance before the deferred interest payments are due.

Tips to manage your deferred interest promotion

If you’re going the deferred interest route, keep the following tips in mind:

• Perform the calculations. Determine the monthly payment required to cover the deferred interest offer’s cost before the no-interest period expires. Continuing with our $2,000 laptop example, imagine you received a 12-month, 0 percent deferred interest promotional rate on your 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 make 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, it is also not recommended that you carry other balances on that card. Should you choose to carry other balances, 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.
• Explore alternatives. If you are hesitant about accruing deferred interest once the promotional period ends, consider opting for a personal loan or a card featuring a 0 percent introductory APR offer to bridge the gap.

Is deferred interest worth it?

Deferred interest may be beneficial if you require financing for an essential item and lack immediate cash. However, unless you are 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.

Keep in mind that even a single late payment or falling short by just a penny in repaying your balance in full within the promotional period could lead to significant deferred interest charges, often accrued at rates exceeding 25 percent.

For peace of mind, 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.

Alternatives to deferred interest offers

If you’re concerned about the possibility of not paying your deferred interest balance in full by the end of the promotional period, there are less risky options. These alternatives to deferred interest deals can offer lower interest over time or split purchases into more manageable payments to help you manage your budget and save money.

• 0 percent APR credit cards: Applying in advance for an introductory 0 percent APR credit card and using the card to make larger purchases can help you avoid deferred interest. A 0 percent APR card typically has a longer introductory APR period — anywhere from six to 21 months — before transitioning to its standard APR. Interest won’t accrue for the entire balance of the purchase either, only the remaining balance on the card should you not repay it before the introductory APR ends.
• Buy now, pay later: Affirm, Afterpay, Klarna and PayPal are some of the most popular buy now, pay later (BNPL) options. These companies allow you to divide large purchases into lesser amounts over time. For example, they may offer an interest-free, pay-in-four option, though some monthly payment options come with APRs and additional fees.
• Personal loans: While you’ll pay interest on personal loans, they typically offer lower interest rates than credit cards or interest charged on a deferred balance. Before getting a personal loan, review the best options to avoid extra fees or high interest rates that could offset the benefits.
• 0 percent balance transfer card: If you’re unable to pay off your deferred interest offer during the promotional period, consider applying for a 0 percent 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.
• Home equity loan: Using a home equity loan is another option to obtain financing for a purchase. It could also be a good option if you’re unable to pay off your deferred interest deal before the promotion ends. It is important to proceed cautiously with this option, however, as your home will be used for collateral.

The bottom line

Taking advantage of deferred interest offers can be beneficial if you can pay off the full purchase amount before the introductory period expires. It’s essential to carefully review the terms and conditions to prevent any surprises and plan monthly payments at a level that ensures your entire balance is covered within the specified time frame of the offer.

Implementing automatic payments and other strategic measures can help you stay on track and avoid the unexpected burden of a lump-sum interest payment on your total purchase amount.

Lastly, remember that, despite not owing interest, you’re still borrowing money and accruing debt that requires repayment. Phrases like “no interest” may create the illusion of free money, but in reality, it must still be repaid at a later time.