You may be familiar with the term, but you may still be wondering: What does deferred interest mean, and is it good for me? Deferred interest offers are similar to the 0 percent introductory annual percentage rate (APR) offers often found on credit cards, which offer financing without accruing interest during a promotional period.
However, deferred interest promotions differ from introductory APR credit card offers in that they begin accruing in the background as soon as you accept the offer. If you don’t pay off the full balance by the end of the promotional period, you’ll be liable for the full accumulated interest, even if you only owe a penny of the original amount. Once a 0 percent introductory APR credit card offer period ends, you’ll only be charged interest on the remaining outstanding balance.
Before accepting any late payment interest promotion, there are some important points to consider.
What is late payment interest?
With an extended interest offer, you borrow money and postpone, or defer, the interest you would otherwise pay for a set period of time. Interest technically starts accumulating from the original purchase date, but if you pay off the balance within the promotional grace period, you won’t have to pay interest.
However, if you fail to clear the balance before the promotional period ends, you will be responsible for paying all late interest that accumulates over time.
Late Payment Interest and 0% APR
The main difference between a 0 percent APR introductory offer and a late interest promotion is how the issuer handles interest during and after the promotional period. While both options have the potential to reduce your interest charges, opting for a 0 percent APR introductory offer will usually result in greater savings and peace of mind.
With a 0 percent introductory APR offer, the lender won’t apply regular interest to the balance until the interest-free period ends. For example, if you charge $2,000 for a 0 percent introductory APR credit card in the first 12 months and pay $1,000 during this period, your credit card will only accrue interest on the remaining $1,000 balance after the introductory period ends.
In contrast, if you were in a similar situation and received a late payment interest offer, you would be required to pay interest on the remaining $1,000 balance, plus all interest accrued on the entire $2,000 you borrowed from the date you first accepted the offer.
How does late payment interest work?
Retailers that specialize in selling big-ticket items like appliances, electronics, and furniture often offer deferred interest loans or credit cards as standard financing options. These offers are frequently rolled out around the holiday season when consumers are looking for shopping deals, and are often advertised as “no interest for 12 months” or “money for cash” offers.
Deferred interest loans are attractive because they allow you to take home the home you purchase without paying interest for a set period of time (usually six months to two years).
However, interest will accrue on the entire balance from the date you accept the offer. To avoid paying the full amount of interest, you must clear the entire balance by the end of the offer period and avoid late payments. Setting up automatic payments is a simple solution to ensure your bills are paid on time.
Bankrate Insights
Let’s say you need a new refrigerator. You can pay $1,800 up front or choose the store’s “No Interest for 24 Months” late interest offer, which has a regular APR of 25.99 percent. If you can budget at least $75 per month for the 24 months, you can pay off the balance and avoid interest. However, if an unforeseen circumstance arises, such as a medical emergency or an unexpected loss of income, and you are unable to pay off the balance during the promotional period, an additional $900 or more could be added to your balance to cover the accrued interest. In addition, if you carry a balance after the promotional period ends, the higher regular interest rate will be applied to the balance until it is paid off in full.
Stores and lenders offer these types of loans because they can make a big profit off of individuals who are late with their payments (or don’t understand the terms), so before you accept any late interest offers, make sure you can pay the full amount back before the offer expires.
How to tell if an offer or promotion is a late payment charge
Late interest promotions often use phrases like “No Interest for 9 Months” or “No Interest if Paid in Full.” It’s important to pay attention to the specified time period or full payment requirement, because this indicates that if you don’t pay in full by the end of the promotion, you may be liable to pay interest retroactively on the purchase price from the date you accept the offer.
Store cards and co-branded cards, which usually offer exclusive rewards to certain stores or brands, are more likely to feature late payment interest promotions than traditional credit cards. You may also see late payment interest financing offers when purchasing big-ticket items such as refrigerators, computers, and televisions.
Late interest financing may also be available through your primary care physician’s office, where you may be offered a medical credit card to help pay for medical or surgical expenses. According to the Consumer Financial Protection Bureau, consumers paid more than $1 billion in late interest between 2018 and 2020 after using medical credit cards or medical installment loans to pay for medical-related expenses.
Before accepting any interest-free promotional offer, it’s important to carefully check the fine print to see if it’s actually an interest-free plan. Alternatively, you can access your credit terms through your card’s online account. If in doubt, ask customer support for the details of the offer.
The pros and cons of late payment interest
Late payment interest offers can be a convenient way to make big purchases, but they also come with significant drawbacks. It’s important to fully understand what late payment interest means before you make a decision. As with any credit offer, you should carefully consider the pros and cons to determine whether it fits with your budget and financial goals.
Strong Points
- Potential savings. If you pay off your balance in full during the promotional period, you won’t pay interest on your purchase. This is a rare opportunity to eliminate interest charges entirely, but only if you’re confident you can pay off your balance in full before the promotional period ends.
- It will be easier to get qualified. These offers can be easier to qualify for than many credit cards, especially if you have bad or fair credit and need to finance big-ticket essentials like air conditioners or refrigerators, providing you can pay off the balance on time.
Cons
- High interest rates. Late payment interest offers often come with interest rates that are significantly higher than the average credit card interest rate, typically ranging from 25 to 32 percent on the entire initial balance, whereas the average credit card interest rate today is just over 20 percent.
- Retroactive interest billing. If you don’t repay the entire balance before the promotional period ends, you will be charged interest on the total original purchase price, backdated to the date of the transaction.
- Pay attention to the fine print. The terms of late payment offers vary by issuer or lender, and certain actions, such as late payments, may void a late payment offer. It is important to thoroughly review the terms of the offer before accepting it. If you carefully review the fine print, you may find that the promotional offer will end if you do not make your monthly payments. In such a scenario, you may be required to pay the full amount of the accumulated interest that has accrued. Additionally, your already high interest rate may increase even further.
How to avoid paying late interest
If you choose the late payment interest method, keep the following tips in mind:
- Run the calculation. Before the interest-free period ends, determine the monthly payment required to cover the cost of the late interest offer.
- You have exceeded the minimum payment. If you make a large purchase with late payment interest, keep in mind that the minimum payment required by the lender may not be enough to pay off the balance in full before the promotional period ends. It’s up to you to decide how much you need to pay each month to pay off your balance in full on time.
- Set up automatic payments. Set up automatic payments that will deposit funds into your account before your payment is due each month so that a single late payment doesn’t void your offer.
- Consider alternatives. If you’re worried about incurring late interest charges once the promotional period ends, consider opting for a personal loan or a card with a 0 percent introductory APR offer to bridge the gap.
Is late payment interest worth it?
If you need financing for essentials and don’t have the cash immediately, late interest can be advantageous. However, if you’re not confident that you can repay the full amount on time, these promotional late interest offers can be risky and lead to significant costs.
Keep in mind that a single late payment during the promotional period, or falling just a cent short in paying off your balance in full, can result in hefty late interest charges, often in excess of 25 percent.
For peace of mind, make sure you’re clear about the length of the promotional period and what your interest rate will be once it ends. Similarly, consider making a plan to pay off your debt several months in advance so you’re not left scrambling when the promotional period ends.
As you pay off the overdue interest, check your balance regularly as the end of the repayment period approaches. If you’re worried about making a calculation error or are unsure whether you’ll be able to pay off the balance before interest accrues, you can adjust your payments accordingly.
Conclusion
Late payment interest offers can be advantageous if you are able to repay the entire purchase amount before the introductory period ends. It is important to carefully review the terms and conditions to avoid any surprises and plan your monthly payments at a level that will cover the entire balance within the specified time period of the offer.
Implementing automatic payments and other strategic measures can help you stay on track and prevent the unexpected burden of lump-sum interest payments on your total purchases.
Finally, remember that even if you don’t charge interest, the debt is still a debt that you must repay. Phrases like “no interest” create the illusion of free money, when in reality, you still have to pay it back.
