Deferred Interest Loan vs. 0% APR

Here’s a scenario that you can relate to: you take a trip to the appliance store in search of a new washer and dryer to replace your broken set. While the sets are expensive, you notice that the retailer offers in-store financing that allows you to make monthly payments on your purchase without owing any interest for two whole years. This is an example of deferred interest. 

If you decide to agree to a deferred interest contract, it’s crucial that you fully understand the terms before signing on the dotted line. When you’re equipped with an understanding of how deferred interest works, you can take full advantage of it—and even avoid paying any interest at all on expensive purchases. Now that’s pretty great. 

Here are some things you need to know about deferred interest: its benefits and drawbacks, and how paying close attention to the phrasing of these offers can save you hundreds of dollars (or more).  

What is deferred interest, anyway? 

You probably already know that lenders tack on interest when you take out a loan. That’s how they make money for lending you funds. Financial experts will tell you that interest rates reveal how much you’ll pay for borrowing money each year. The interest charges themselves, however, accumulate on a daily basis. These fees are then totaled up at the end of each billing period to give you your total monthly interest.  

Deferred interest postpones these interest charges for the duration of a specified promotional period—usually 12, 18, or 24 months. If you pay off the loan before this period ends, you won’t pay any interest on the money that you borrowed.  However, if you don’t repay the entire loan before the promotional period is up, the interest that would have normally accumulated over the life of your loan will be added to your total balance due, and you will be responsible for paying the remaining principal balance plus the interest.  

If you take the time to understand all the terms laid out in a deferred interest contract before accepting an offer, you can put yourself in a position to repay your loan while avoiding additional interest. 

A closer look at deferred interest in action 

Let’s take a look at an example of how you might use deferred interest to make an expensive purchase. 

Say you want to buy your mom something special for Mother’s Day. You end up deciding on a beautiful diamond necklace worth $2,000. The problem: You don’t have the money upfront. But your jeweler tells you not to worry. He offers you a special financing plan with deferred interest that will allow you to take the necklace home that day and pay it off in monthly installments. It sounds great, so you agree. You pay 10% of the total price of the necklace ($200) at the store and agree to make monthly payments on the remaining balance. Even better, you won’t have to pay any interest for a full year. It’s a win-win for you and Mom! 

Luckily, since you stuck to a budget and made sure you had enough money set aside to make these monthly payments, you were able to pay off the necklace with one month to spare. It’s the same for the majority of people who take advantage of deferred interest offers: Most people are able to pay off their entire balance on time.  

For the remaining 20% who don’t repay the loan within the promotional period, things can look very different. 

The pros and cons of deferred interest offers 

Deferred interest options can come in handy—especially when you need something right away (like that washer and dryer set) but do not currently have the funds to pay for it out of pocket.  

Deferred interest also gives you the freedom to pay off the loan as much as you want, as often as you want (although you’ll still need to meet your minimum monthly payments). If you know that next month’s bills will be higher than usual, for instance, you might choose to put more towards your loan this month and a little less the next. 

However, make sure that you read the loan terms closely before you accept a deferred interest contract.  Depending on a contract’s terms, missing even one payment may cause the deferred interest to kick in automatically.  If the loan isn’t paid off in full by the end of the promotional period, the interest owed is calculated not just on the remaining balance, but from the amount of the original purchase. That can end up costing you much more than expected. 

With the right financial strategy, you can take full advantage of deferred interest contracts. It’s all a matter of how well you can manage your finances. 

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

It’s easy to confuse these two terms. They’re almost identical in the way they’re worded and in what they refer to, but with one key difference. Deferred interest accumulates both during the promotional period and into the new loan term. 

With 0% APR loans, on the other hand, what you see is what you get. Interest only begins to add up after the promotional period ends. You won’t have to worry about accruing interest during the introductory period, and if you can’t pay off the loan completely before this period ends, interest will only accumulate on the debt you haven’t yet paid off. 

So, how can you spot the difference while you’re out shopping? 0% APR offers are advertised “as is.” Conversely, when retailers describe deferred interest options, they typically refer to them as “the same as cash” or “no interest for X months.”  

Is deferred interest right for you? 

It depends. If you understand how they work and make sure to pay off your debt before the deadline, you can benefit substantially from deferred interest offers. It’s important not to make a high-ticket purchase just because you have the option of deferred interest. If you wouldn’t be able to afford the item without the promotion, you may want to reconsider buying it. Be wary of deals that sound too good to be true—they usually are.

The bottom line: If you’re ever unsure about the terms of your contract, talk to your lender before signing.