Are you considering making a large ticket purchase on credit, taking advantage of a deferred interest offer?
Years ago, before I knew that deferred interest offers were a thing, I was at a meeting where a friend related her experience with buying on credit using a deferred interest offer.
She and her husband purchased their living room furniture by taking advantage of a too good to be true offer. They could buy the furniture they had long wanted and the interest on the purchase would be deferred for eighteen months.
Long story short, they didn’t read and understand the fine print. The interest that they ended up paying was more than the cost of the furniture.
Ouch! That is not the way to learn about the perils of buying on credit using a deferred interest offer.
While it was a sad experience for them, I took their lesson to heart and had my eyes wide open every time one of those offers landed in my mail.
What is deferred interest?
Deferred Interest is when you purchase an item with credit, or borrow money, and the interest you owe is delayed for a promotional period of time.
During the promotional period all the payment is going to principal (the amount of the purchase only).
What’s important to understand is that the interest is still accumulating and will be owed if the balance is not paid in full before the end of the promotional grace period.
Don’t confuse deferred interest with 0% APR.
Deferred interest is exactly what the name implies. Interest is accruing, it’s simply deferred for a set amount of time.
With 0% APR, no interest begins accruing until the end of the promotional period. Interest will begin accruing on any remaining balance at the end of the promotional period.
Here’s an example:
You spend one thousand dollars on new kitchen appliances by taking advantage of a credit card offering a deferred interest option.
The interest begins immediately accumulating.
Despite your best efforts, you are only able to pay off five hundred dollars by the end of the promotional period.
On day one, following the end of the promotional period, you will owe the total amount of interest that has accumulated, back to the date of the purchase.
As my friend did, you could end up owing more in interest than the cost of the original purchase.
If you had made the same purchase with an introductory 0 percent APR, on day one, following the end of the promotional period, interest would begin accruing on the remaining five-hundred-dollar balance.
Quite a difference in the amount of interest that will be owed.
Before you purchase anything on credit with a deferred interest offer, take these steps to protect your finances.
Read the fine print.
The terms and conditions will differ with every offer, make sure you know what they are.
Do the math.
Know when the promotional period ends and calculate what the monthly payment needs to be to ensure it’s paid off well before the end of the promotional period.
Budget for the payment.
Update your zero-based budget so that the payment is part of your ongoing monthly budget.
Set up automatic payments.
On some offers, a late payment can negate the entire offer.
To avoid making any late payments, set up automatic payments.
Give yourself a comfortable cushion of time by making the payment date at least five to ten days prior to the due date of the payment.
If you aren’t able to consistently make at least the minimum payment, reconsider making the purchase.
Ensure the payment posts to your account.
After the scheduled payment date, log on and ensure the payment has been credited to your account.
Things happen, even in banking.
It’s happened to me personally and to others I know.
Don’t take a chance!
Have a Plan B in place.
In the event you are unable to pay off the purchase on time, from where will you get the funds?
Do you have enough savings to cover it?
Note: If you have enough in savings, consider a pledge loan.
Will you qualify for a personal loan, or do you have a credit card to which you can transfer the balance?
If there is no plan B, give a second thought to buying.
Is making a purchase on credit using a deferred offer worth it?
Buying a large ticket item on credit, using a deferred interest option, has its benefits.
It makes budgeting for a large ticket item easier and keeps your savings account intact.
The downside is that you could end up owing more in interest than the cost of the purchase.
Remember, once interest is added to your balance, you will begin accruing interest on the interest!
Are you considering making a large ticket purchase on credit, using a deferred interest offer?
Using a deferred interest offer to make a large ticket item has some definite benefits.
Just be super aware of the pitfalls and have a solid plan in place to ensure the balance is paid in full on time or early.
After all, having new living room furniture or appliances is great. Spending the next several years paying for it, not so much.
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