Everything You Need to Know About Deferred Interest Financing

You're eyeing a sumptuous purple couch in the furniture store, a stylish couch that would look perfect in your new apartment. But that price tag. Ooof! Then the salesperson tells you they're running a financing special: everything in the store is interest free for 18 months. It makes that purple couch absolutely doable with your tight budget. But before you go through a credit check and sign on the proverbial dotted line, here's what you need to know about deferred interest financing.

Whenever you're in a retail shop, or even online, and see promotional advertising that announces "12 Months of Special Financing!" or "0% Interest if Paid in Full in X Months," you're looking at a deferred interest offer. Your interest will be deferred over that period of time; it won't be nonexistent. It's another way of saying that interest will begin accruing on your purchase from the moment you accept delivery of the sofa. The only way you get 0% interest is to pay off your debt before the promotional period ends. Only then will you have a truly interest-free experience.

Unfortunately there's many a consumer who hasn't read the fine print on their disclosures or credit statements, and are shocked when, after the promotional period ends, they see a large interest charge show up on their account. That's the deferred interest landing with a thud, interest that started the day they walked out of the store or clicked "I agree." They go through the promotional period thinking interest will start accruing on their balance after the promo period ends. A Consumer Financial Protection Bureau study noted that many consumers were paying off the balances on their accounts along with their deferred interest shortly after their promotional periods ended, suggesting that these interest charges surprise a lot of consumers. And for those consumers who can't pay off their debt, interest keeps accruing, month after month, often at rates of 25.0% and higher!

Deferred interest financing isn't necessarily bad, especially if you're savvy with it. For example, last year when I was going through a divorce, I needed furniture for my new home but I didn't want to tie up a chunk of cash while my case wound its way toward closure. Instead, I snagged a 12-month no-interest deferred financing deal, got the furniture delivered, and each month have been able to make a significant payment toward the debt without digging into my savings. The debt will be paid off well before the 12-month period, and I will have enjoyed a truly interest-free buying experience without tying up my capital.

Thinking that a deferred interest financing deal might be a sweet deal for you, too? Here are some tips to make it work:

• Ask yourself if the promotional time period is doable for your budget. That purple couch may look great in your new living room, but you might begin resenting it if you're struggling to make monthly payments, you know you have some big expenses coming up in your future, or find yourself with even more debt when the promotional period ends.
• Ignore the minimum monthly payment on your statement if you want a true 0% experience. That number will be an enticingly small amount. Instead take the total amount financed, divide that by the number of promotional months, and use this figure as your minimum monthly payment. Pay more if you can, and if you have to pay less one month, know that you'll need to make it up later in order to avoid an interest payment.
• Make your payments on time. This is a biggie. One late payment can be enough to void promotional terms and you'll find yourself paying not only the deferred interest to date, but late fees and interest moving forward.
• Use deferred interest financing only when you have enough money on hand to pay off your balance. Of course you could use your own money, but we all have reasons not to tie up our own cash (my divorce, your wish to build your credit). This way you'll never have to worry about paying exorbitant interest rates if you haven't paid off the balance before the promotional period ends.
• Do some quick math before you enter the store. You may end up paying less for your couch with a low-interest credit card than you would with "0% interest if paid in full by X" deferred financing. Let's say the store has an APR of 29.99%. You know it's highly unlikely you'll be able to pay off your purchase during the promotional period, which means you're going to get whacked with that accrued interest when your promo period ends. Paying for the couch with a credit card that has a much lower rate could be a better financial decision, especially if you can pay it off soon after the promo period ends.

Here is something else I've done in the past to get what I wanted: I saved for it. I know that's old fashioned advice, but there's something very satisfying about delaying gratification and stashing money aside to pay for whatever it is that has grabbed your fancy, whether it's a vacation, a designer watch, or a purple couch.

In this instance, you could resolve to purchase a purple couch in a year and start saving for it today. Opening a Your Way savings account with Hanscom FCU will get you an amazing rate on your savings, and you can start with as little as $5 a month or as much as $500. 

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