What Is Deferred Interest?

If you play your cards right, deferred interest (also known as “same-as-cash” financing) can be a great way to save money on large purchases.

However, it can be risky as well—deferred interest is a well-known money-making scheme that many retailers and lenders use to trick consumers into accepting high interest rates.

Read on to learn everything about how deferred interest works, what the risks are, and how to make it work to your advantage.

How does deferred interest work?

When you take out a loan or charge a purchase to a credit card, your balance will usually begin accumulating interest (additional charges that you have to pay).

However, if your loan or card has deferred interest, it will come with a special promotional grace period, which might last anywhere from several months to several years. You won’t have to pay any interest at all if you completely pay off your purchases by the end of this period.

However, if you fail to pay off your entire balance by this date, all of the interest you would have accumulated during your deferred interest period will immediately come due. The amount you owe will instantly increase as months of previously untallied interest are stacked onto your balance.

This will also happen if you miss your minimum monthly payment on your credit account at any point during your deferred interest period.

Illustration of Deferred Interest

What types of credit accounts offer deferred interest?

You’ll most often encounter deferred interest offers with retail financing (i.e., when you buy something in a store and they offer a payment plan). You may also get offers on deferred-interest loans from lenders, such as deferred-interest mortgages or personal loans.

You can also get deferred-interest credit card offers, but these are less common. It’s more common for credit cards to offer an introductory 0% APR period.

What’s the difference between deferred interest and 0% APR promotions?

Before you accept a financing offer, it’s important to understand that “deferred interest” isn’t the same as “no interest”. Put simply, zero-interest financing is much less risky than deferred interest.

Unlike deferred-interest financing, zero-interest financing doesn’t come with a catch. No interest whatsoever will be charged during the interest-free period. After this period ends, interest may begin accumulating at the credit account’s regular interest rate, but it’ll only apply to your current (remaining) balance.

In contrast, with deferred interest offers, interest charges are secretly accumulating the entire time—you just won’t find out about them until and unless you fail to pay your balance off in time.

Example of how deferred interest works

To give you a better understanding of what deferred-interest looks like, consider the following example.

You’re shopping for a new washing machine and dryer. You’re about to go with a basic model, but a sales rep tells you that you can get a payment plan for a high-end product that costs $3,000 with absolutely no interest if you pay in full within 12 months. All you need to do is pay 10% upfront.

You accept the financing offer and pay $300 (10% of $3,000). You now owe $2,700.

The store requires a minimum monthly payment of $200. Note that this isn’t enough to pay off the full balance by the end of the promotional period (that would require $225).

What happens next depends on whether you pay just the monthly minimum or the full $225 per month.

If you pay in full

If you pay the full $225, then by the end of the 12-month deferred interest period, you’ll have paid off your entire balance. Your interest will never come due, and you’ll own the washer and dryer, having paid $3,000 in total.

If you pay the monthly minimum

On the other hand, if you only pay $200 for 12 months, things look a lot worse for you.

• At the end of the deferred-interest period, you’ll still owe $300.
• The loan’s regular interest rate of 18% will be retroactively applied to the entire $2,700 you borrowed, starting from the day you first made your purchase.
• From now on until you fully pay off your balance, the 18% APR will apply to the amount you owe, and more interest charges will be regularly added to your balance.

This example shows both the benefits and the risks of deferred interest. It can help you afford high-end products that ordinarily might be beyond your reach, but it can also lead to you paying hundreds of dollars in interest if you aren’t careful.

The important thing to remember is that you ultimately have control over whether you end up paying interest on a deferred-interest plan. It all comes down to how much you pay per month.

How to avoid paying deferred interest

If you’re considering signing up for a deferred-interest financing plan or you’ve already got one, there are several steps you can take to stay ahead of the game:

• Read the fine print: Again, lenders won’t always advertise the details about deferred-interest financing plans, so it’s up to you to identify important information, like minimum payments, due dates, APRs, and when they can charge you interest.
• Don’t just make the minimum payment: A common mistake is only sending in the minimum payment your lender requires from you and not the actual amount you’d need to pay off your full balance in time to avoid interest charges.
• Never skip a payment: Some deferred-interest plans have clauses that allow lenders to charge you all your deferred interest if you skip a payment or send in a late payment.
• Pay off your balance early: If you have the money and your creditor doesn’t stipulate an early-payoff penalty, then consider just paying off your full balance before it’s due. This way, you don’t run the risk of forgetting or having budgeting issues that cause you to come up short.

If you think you’ve been treated unfairly or charged interest that you shouldn’t have to pay, then you can dispute the charges with your loan servicer. If they aren’t helpful, you can escalate by filing a complaint with the Consumer Financial Protection Bureau.

Is deferred-interest financing a good idea?

Deferred-interest promotions can be a valuable opportunity or a big mistake. It all comes down to how you handle the financial commitment.

Bear in mind that deferred-interest promotions can come with higher APRs than other financing plans. Retailers and lenders are able to charge these inflated APRs because they know many customers will assume they’ll never have to pay interest at all.

If you don’t think you can repay your full loan by the end of the deferred-interest period, then it’s a good idea to explore alternatives.