How does this offer sound? You can take out a loan or a credit card and not have to pay any interest on what you’ve borrowed if you make your payments on time and pay off your balance before a specific date.
That’s the promise behind deferred interest loans or credit cards. They give you a chance to borrow money without having to pay interest – if you follow the rules.
That “following the rules” part is key. If you ignore the rules, you could take a big financial hit.
How Does Deferred Interest Work?
Like the name suggests, it’s all about putting off your interest payments on money you’ve borrowed (or eliminating them altogether). If you’ve taken out a credit card or loan with a deferred interest period, interest will continue to accumulate on your card’s unpaid balance each month. Your card’s provider or lender will waive your interest payments while the deferred interest period is in effect. The deferred period will vary by lender or credit card provider, but it usually lasts from 6 to 12 months.
If you’re good at budgeting and you always make your monthly payments on time, a deferred interest offer might pay off. That’s because when you pay off your balance in full before this period ends, you aren’t responsible for paying any of the interest on your loan or purchases. This is the positive part of a deferred interest credit card or loan. It could save you a significant amount of money.
The problem comes when you don’t pay off your balance before the period of deferred interest ends.
Considerations Of Deferred Interest
Jared Weitz, Chief Executive Officer and the founder of United Capital Source in Great Neck, ’s New York, said that deferred interest loans and cards only benefit consumers who pay off their loans in full before the deferred period comes to an end.
If you don’t do this? Depending on the policy of your lender or credit card provider, you might have to pay interest on your total purchase, not just on the balance you still have to pay.
Say you only make the minimum payment each month on a loan of $5,000 with a deferred interest period of 6 months. If you still owe $2,500 by the time these 6 months pass, your lender might not just charge you interest on that amount. Instead, it might charge you interest for the full $5,000 you borrowed.
Another potential pitfall? The interest rates attached to deferred interest loans and credit cards are often higher than what you’d qualify for when taking out a traditional card or loan. This means you might owe a significant amount of extra money once the deferred period ends.
“Customers could be slammed with such a high payment increase to pay off a loan that they could end up in foreclosure,” Weitz said.
It’s important for consumers to study the fine print when taking out a deferred interest loan or credit card, Weitz said. It’s especially important to understand when interest is charged and on what amount of money, the final balance they owe or the total amount they borrowed.
Igor Mitic, co-founder of the financial blog Fortunly.com, said that deferred interest can be a way for consumers to budget for bigger purchases. Realistically, though, it can be difficult for consumers to keep track of when their deferred interest period ends. Consumers today often have too many monthly expenses they’re already tracking.
And if consumers aren’t keeping a close watch on their deferred interest cards or loans, they’re more likely to not pay off those balances before the deferred period ends, Mitic warned.
“It functions as a kind of ticking time bomb that quietly ticks away in the background,” he said. “Before you realize it, your credit card has ballooned to unaffordable levels.”
Should You Use Deferred Interest
If you struggle to make your payments on time each month, a deferred credit card or loan could be a poor choice. That’s because some card providers or lenders will immediately cut your deferred interest period short if you make a late payment. Again, the key is to understand the terms and conditions of your loan or card to make sure you don’t accidentally void your deferred interest offer.
Daniel Ray, independent agent and owner of Jacksonville, Florida-based insurance company PinnacleQuote, said that deferred interest is a good financial move for consumers who can pay off the money they borrow on time. He added that those who can’t will face higher payments each month.
“If you are treating this like a typical loan or credit card, then you will put yourself in a bad situation,” Ray said.
Ray recommended that borrowers ask what their combined payment of principal and interest will be in 24, 36 and 48 months. You should also study your household budget to make sure you can pay off your loan or credit card debt before the deferred interest period ends. If you don’t, your monthly payment will jump. And if your budget is stretched too tight, you might not be able to make payments that are high enough each month to whittle down that debt.
“If you are paying it down with minimal payments, you will never get out of debt,” Ray said.
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