Why you should avoid deferred interest offers

Key takeaways

• Deferred interest offers allow consumers to make purchases and avoid interest charges during a promotional period, which usually lasts about six to 12 months.

• Consumers who pay off their entire balance during the promo period will avoid paying interest charges.              

• If you are unable to pay off your entire balance before the promotion expires, you will owe interest on the entire purchase — potentially costing you more in the long run.

• Carefully consider your options before enrolling in a deferred interest offer, and only proceed if you can pay off your balance before the promotional period ends.

If you’ve been considering a large purchase, inflation — which continues to run high — is probably weighing on your mind. This year’s stubborn inflation numbers mean you’ll likely continue paying more for your purchases than you would have just a few months ago. Of course, that leads to more and more shoppers seeking bargains.

In the quest for finding the best deals, you may come across a deferred interest offer from a retail store or card and wonder if it’s a good idea. While this sort of promotion might seem to be the answer to your inflation-influenced cutbacks, you might end up paying more for your purchase over the long run, making it important to consider the risks of deferred interest and potential alternatives.

How deferred interest offers work

When you sign up for a deferred interest credit card promotion, it means you won’t pay interest during a specific period — typically from six to 12 months. If you pay off your entire balance during this period, you won’t owe any interest on your purchase.

Getting away without paying any interest may seem like a good deal, but that’s not always the case. The lender will continue to tally the interest during the entire promotional period. If you still carry even part of the balance at the end of this period, you will owe all of the interest that has accrued over the course of the loan.

For instance, if you buy a $2,000 laptop on a deferred interest promotion and have paid off $1,900 at the end of the promotional period, you would still be on the hook for the accrued interest on the amount you have already paid off. At a 29% APR, you would owe nearly $330 in unpaid interest. Additionally, you would have to pay interest on the remaining $100 balance as the interest continued accruing.

It’s important to note that a deferred interest promotion is different from a waived 0 percent promotional interest card in that no back interest accrues with the latter. When your 0 percent promotion ends, you will only pay interest going forward on the balance you owe. Interest will not apply on a retroactive basis.

Risks of deferred interest

In most cases, deferred interest offers should be avoided because of the risks involved. 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.

For instance, what happens if you lose your job and can’t pay off your balance before the promotion ends? Or, what if you have an unexpected car repair or medical expense that you have to prioritize instead? Any type of unexpected expense could completely derail your plans, especially if you don’t have an emergency fund that you can use to take care of the costs.

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.

Carrying other balances, such as purchases or cash advances on your credit card, is also a bad idea. In this case, payments you make above your minimum payment are not necessarily applied to your deferred interest balance. This can also interfere with your plans and hinder your ability to pay off your balance before the deferred interest payments are due.

The Credit Card Accountability Responsibility and Disclosure Act (CARD Act) states that when you make more than your minimum required monthly payment, the issuer should apply the excess amount to the balance with the highest interest rate.

So if you’ve taken out a cash advance with a punishingly high interest rate, the issuer would apply that excess payment toward the balance. However, there is an exception for deferred interest payments — which means you would have to talk to your lender to ensure that your excess payments are applied to your deferred interest balance. In any case, lenders are required to automatically apply any excess payments to your deferred interest balance for the two billing periods prior to the promotion ending, even if you don’t specifically choose that option.

Tips to manage your deferred interest promotion

Before signing up for a deferred interest promotion, make sure you will be able to pay off the entire balance by the end of the promotional period. It is important to calculate how much your monthly payment should be to pay off the amount. In many cases, making only the minimum payment required means you will still have a balance when the deal period ends — which would trigger the deferred interest to become due.

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.

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.

Setting up automatic payments from your bank account is a great way to ensure that you make your regular monthly payment on time. It’s also important that you read the fine print of your offer so you can discover any pitfalls you may need to watch out for.

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 up purchases into more manageable payments to help you manage your budget and save money.

• 0 percent APR credit cards: Applying in advance for a 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 their 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 help you split larger purchases into smaller 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 are unable to pay off your deferred interest offer during the promotional period, consider applying for a 0 percent balance transfer card. Doing so will give you more time to pay the remaining balance without accruing interest during the introductory APR period.

• 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 are 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

It is important to carefully consider your options before electing to use a deferred interest promotion. Although you may be able to avoid paying interest by paying off the entire balance before the promotion ends, there are consequences if you don’t. If you enroll in one of these offers and find you’re carrying a balance when the promotion nears its end, look for alternative sources of financing to avoid hefty interest charges.