Deferred InterestExplained, Advantages & Disadvantages, and Examples

Patrick Louie

Date Published: August 4, 2022

Loans generally carry an interest component with them.

Interest serves as the fee for borrowing money.

You get the money now, and then you pay it back later but with interest. 

However, you may come across credit cards that have “0% interest” or those that have deferred interest.

So, how does that work?

Well, in a nutshell, as long as you pay the full balance before a certain period, you won’t have to make any interest payments.

Sound good right? This is one of the reasons why credit cards are popular.

However, these credit cards usually come with a steep cost if you are unable to pay off the full balance by the time the deferred interest period expires.

First, you will have to pay interest on any remaining balance.

But in addition to that, you will also have to pay for all the interest that accrued during the deferred interest period.

It’s as if you didn’t have a “0% interest” credit card all along.

Well, that’s because they’re not truly “0% interest”. Instead, what they have is deferred interest.

You’ll mostly find these deferred interest financing offers when you shop for high-value items such as computers, refrigerators, televisions, washing machines, etc.

They market these financing offers as “0% interest”.

However, upon looking at the terms and conditions, they’re actually deferred interest financing offers.

Just keep that in mind when you later shop for such items.

In this article, we will be exploring what deferred interest is.

What is Deferred Interest?

deferred interest

Deferred interest refers to any interest payment that is deferred during a specified period.

For example, a deferred interest financing offer has a period of 12 months.

This means that any interest charges during this period only become due when it ends.

What makes deferred interest financing offers alluring is that you usually don’t have to pay any interest if you are able to pay the full balance before the deferred interest period expires.

However, if there’s still any remaining balance when the deferred interest period ends, that’s when the full force of all those deferred interest payments comes and hits you.

Because of the allure of not having to pay any interest, deferred interest financing offers continue to stay popular even with their potential hefty cost.

You’ll often find these offers on high-value items such as cars, furniture, tech gadgets, etc.

These offers make these high-value items easier to purchase.

Instead of paying for the full amount upfront, customers can instead pay it in installments with no additional interest.

Well, that is if the customer pays for the full balance before the deferred interest period expires.

If the customer is unable to pay the full balance when the deferred interest period ends, then s/he will have to pay interest on any remaining balance.

But that’s not all. In addition, the customer will have to pay for all the interest payments that were deferred during the deferred interest period.

Sometimes, there may be additional charges too such as late fees, penalties, etc.

Anyone who avails of or is planning to avail of deferred interest financing offers should look closely at the fine print.

Also, always be mindful of the deferred interest period.

Credit cards and mortgages may also offer deferred interest.

Deferred Interest on Credit Cards

You’ll often hear of credit card horror stories where the balance becomes so huge that the only way out of it is to declare bankruptcy.

But even with such stories, many people still avail of credit cards. What gives?

Credit cards usually carry with them deferred interest. It is one of the marketing strategies that credit card providers have up their sleeves.

To make credit cards more enticing to customers, make it so that they won’t have to pay any interest if they are able to pay in full before the next statement period.

So, as long as the customer pays off the balance in full before the period expires, s/he won’t have to pay any interest.

However, if the customer is unable to pay the full balance before the period ends, s/he will usually have to pay a hefty amount of interest along with late fees.

Credit cards usually charge upwards of 20% interest on late payments. In addition, they might charge additional charges that are stated on the fine print (which the customer signs).

This is how most credit card account balances rapidly increase.

It is then advised that before you avail of a credit card, be sure to read the terms and conditions.

It may say “no interest”, but you need to clarify how this “no interest” clause works.

Also, make sure that you know the deferred interest period.

Deferred Interest on Mortgages

Deferred interest can still apply on mortgages but with a slight difference.

Mortgages have longer terms than credit cards or in-store financing offers after all.

As such, it would be unreasonable to think that the deferred interest period can apply to the entire mortgage term.

Rather, some mortgages, particularly adjustable-rate mortgages (ARMs), offer the borrower some payment options for the first 2 to 3 years.

This is where the deferred interest component comes in.

For the first 2 to 3 years, the borrower has the option to pay a minimum payment which is usually less than the interest of the loan.

This makes it so that any unpaid interest during this period is deferred until the option to make minimum payments becomes unavailable.

All the deferred interest charges are then added to the principal amount (a process referred to as negative amortization).

After the deferred interest period ends, monthly payments may significantly increase (if the borrower avails of the option to only make minimum payments).

This is why ARMs are widely considered to be predatory by the federal government.

Some states even ban ARM due to how dangerous they can be.

Tips for Handling Deferred Interest

deferred interest 1

The prospect of not having to pay interest is already enough to make deferred interest offers enticing.

As such, deferred interest isn’t all that bad if you know how it works.

So long as you pay the full balance before the deferred interest period ends, it’s all good. So, to help with that, here are some tips when dealing with deferred interest:

Always be wary of the deferred interest period. Keep in mind when it ends.

You’ll usually find the deferred interest period on the front page of your billing statement.

Always take note of it as even just a day of delayed payment will result in hefty charges.

Sometimes, the deferred interest period may not coincide with the regular monthly payment due date.

So make sure to always look at the deferred interest period that is stated on your billing statement.

Make sure to pay on time

Just knowing the deferred interest period is not enough.

You also need to make sure that you make your payments on time.

There’s no use in knowing the deferred interest period if you’re not going to follow it.

Pay more than just the minimum amount

Deferred interest financing offers usually give you the option to make minimum payments.

However, these minimum payments alone won’t probably pay off the entire balance at the end of the deferred interest period.

This means that if you only make minimum payments for the entire period, you’ll have an unpaid balance by the end of it.

This results in you having to pay all the deferred interest charges on top of the interest that will accrue from then on.

It is advisable to calculate how much you should pay every month so that there will be no unpaid balance by the time the deferred interest period expires.

Be sure to read the fine print

Terms and conditions may include charges that aren’t immediately obvious.

For example, a late payment may result in late fees on top of the deferred interest charges.

That’s why it’s important to read the fine print.

They are there for a reason.

Also, make sure to clarify anything that you don’t understand about it.

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