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Loan Basics

What Is Deferred Interest?

Deferred interest is when a no-interest loan or credit card has a period of zero interest—if you pay off the balance before this timeframe ends. If you aren't able to pay it in full by then, interest payments will be owed, often retroactively.

It's important to understand how deferred interest works before you take out a loan or credit card that has one. Otherwise, you may end up paying much more than you expected if the interest eventually comes due.

How Does Deferred Interest Work?

When you shop for a major purchase, such as electronics, furniture or fitness equipment, a retailer may try to sweeten the deal by offering a zero-interest financing offer in the form of a loan or credit card. Some doctors and dentists also offer no-interest financing for procedures. While this type of offer can sound tempting, it usually has a catch and should be approached carefully.

Deferred interest loans come with a set term, such as three years, during which time you'll be charged no interest. Here's the issue: The deal is only good if you pay off the loan in full by the end of that period. If you aren't able to pay it in full by then, perhaps due to an unexpected loss of income, you can get hit with all the interest you otherwise would have avoided. Some financing offers also revoke the deferred interest and retroactively charge you interest if you make even one late payment.

If your deferred interest comes due, the amount you'll be charged could be based on the entire balance of the loan from the start—not just your remaining balance. This can mean a large lump sum that's added to your loan balance. If the regular interest rate is high, which it often is with these offers, the lump sum amount can be shocking. This is one way lenders make money on these "no-interest" deals, because while many dutifully pay off their loan in full and on time, some don't.

You're most likely to see these deferred interest loans and credit cards at retailers, and you can recognize them with phrases like "same as cash," "no interest if paid in full" or "no interest for six months."

Deferred Interest Credit Cards

While less common, you may also see deferred interest offered on credit cards. This works the same way a deferred interest loan does: There are no interest charges on the card's balance for a set period as long as you pay off your balance by the end of the predetermined time.

If you aren't able to pay it off in time, however, you'll owe all of the interest that accrued up until that point. Just as with a deferred interest loan, this steep fee can set you back by a lot, especially if you weren't expecting it.

A better alternative is a 0% intro APR credit card, which offers a no-interest introductory period for a set time, such as one year. During that time, you pay no interest, but interest also does not accrue. That means if you're carrying a balance once the introductory period ends, you will only pay interest charges moving forward—not retroactively like you would with a deferred interest credit card.

Deferred Interest on Mortgages

Some mortgage loans include an option for deferred interest. This choice, also known as a negative amortization loan, has some potential upsides and downsides to be aware of.

With this type of mortgage, you pay less interest than what is actually owed in your monthly payment. On the plus side, this reduces your monthly payments by deferring your interest until later.

However, you still must pay that interest—you just get to delay it since it's added to the loan's total amount. This can increase the overall cost of the loan and take you longer to pay it off.

Does Deferred Interest Hurt Your Credit?

In general, deferred interest financing or payments don't impact your credit any differently than traditional financing. When you defer interest, it still accrues, you just won't owe it if you pay off your balance in time (with a loan or credit card) or later on (with a mortgage).

When it will hurt your credit is the same as with traditional credit—if you make late payments or miss them altogether. Even if a loan or credit card isn't being charged interest every month, you still must make at least a minimum payment toward the debt or risk consequences. This is important to remember if you took on deferred interest debt in an effort to delay paying for it.

In addition to a late payment's potential to harm your credit, it may also be enough for some lenders to end the deferral period prematurely and charge you full interest, which will only make matters worse.

Don't take out a deferred interest financing product unless you're absolutely sure you can afford to make every payment on time, and before interest payments kick in.

Things to Consider With Deferred Interest Promotions

Before you take out a deferred interest loan or credit card, here are a few things to keep in mind:

  • Find out what the monthly payment will need to be to pay off the loan in full, before any deferred interest payments kick in. Double-check that the minimum payments will be enough to pay off the entire balance; if not, you'll need to pay more than that each month. Make sure this monthly payment will fit into your budget before you accept the offer. To be on the safe side, you may plan to pay off your debt a few months early.
  • On the same note, ensure you're clear on the length of the promotional period and what the interest rate will be once it ends—that way if you're unable to pay off the balance before then, you'll know what interest rate to expect.
  • Remember that even though you may not owe interest, you are still borrowing money that needs to be repaid. Phrases like "no interest" can make it feel like free money, but it's not; it's just paid back later.
  • As you pay off deferred interest, check back in on your balance once you get a few months from the end of the term. If you worry your math was off and you're not sure you'll be able to pay off the rest of it before interest kicks in, you can always adjust your payments.

Explore Credit Cards With 0% Intro APR

If you like the sound of zero-interest financing but don't want the risk of deferred interest credit cards or loans, a 0% APR credit card could be a great option. Try Experian's CreditMatch tool to find credit cards you qualify for with a no-interest introductory period.

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