What Is Deferred Interest?
You may think it sounds too good to be true. And you may be right.
February 15, 2022
Have you seen a loan or a credit card offer that promises no interest? You may think that sounds too good to be true. And you may be right. An offer like that generally means that you need to read the fine print carefully.
This type of promotion is often called deferred interest. While deferred interest can be applied to multiple types of borrowing products, you’ll commonly see credit card issuers enact this practice.
What does deferred interest mean? In short, deferred interest allows a borrower to avoid paying interest for a predetermined amount of time, as long as the borrower pays off their loan by the deadline.
Deferred interest is often used as a promotion by sellers of expensive consumer goods such as furniture or cars. Credit card issuers also use deferred interest promotions to attract new customers.
Keep reading as we explore the answers to these questions:
What is deferred interest?
How does it work?
What do you need to know before accepting a deferred interest offer?
What does deferred interest mean?
Deferred interest — also known as retroactive interest — means that the borrower won’t pay any interest if they manage to pay off their loan before the introductory period ends. If the borrower can’t pay off their balance by the deadline, they will owe interest payments. In some cases, that interest is owed retroactively.
The retroactive interest may be based on the entire balance of the original borrowed amount, not just the balance you have remaining, which can lead to a large interest expense in addition to the loan balance. Lenders know that while some customers will pay off their balance in time to avoid paying interest, others won’t, and they’ll make money off those customers.
When it comes to credit cards, it’s especially common to find deferred interest offers through retailers who have their own credit card. You may see deferred interest offers referred to as:
Same as cash
No interest if paid in full
No interest for six months
Similar to a loan with deferred interest, deferred interest credit cards don’t require paying interest on the credit card’s balance unless the borrower fails to pay back their balance by the predetermined deadline.
When will you incur deferred interest?
When you have a credit card with a deferred interest offer, you can make purchases using your credit card, and if you don’t manage to pay your full balance off each month, then you don’t have to worry about interest until the deferred interest offer period ends.
Once that offer period does come to an end, you may need to pay interest that covers not only the remaining balance, but the balance you originally incurred. At this point, you would need to pay off your balance while making interest payments until you fully pay it off.
These interest charges can add up fast. Before signing up for a credit card with deferred interest, it’s a good idea to look over the card terms thoroughly to make sure you understand what you’re agreeing to. For example, some credit card issuers charge additional fees for late balance payments, which can make borrowing with this type of offer even more expensive.
Can deferred interest hurt your credit?
Deferred interest offers affect your credit the same way a credit card that charges interest from the get-go would.
Late payments to a credit card can hurt your credit. While deferred interest doesn’t have a directly negative impact on your credit score, it can cause some harm if the balance isn’t repaid on time.
If you rack up a large balance during the deferred interest offer period and can’t pay it off, you’ll be stuck with interest payments that can make it harder to pay off your credit card debt.
How is deferred interest calculated?
Lenders and credit card issuers calculate deferred interest similarly to other interest charges. Borrowers can review their specific cardholder agreement to confirm how the credit card issuer calculates interest and when they’ll charge it. All cardholders agreements should include the specific terms surrounding any deferred interest promotions.
Here is an example of how deferred interest might be charged if a borrower missed their chance to pay off the balance before the offer period ends.
These are the basics for this scenario:
Credit card balance: $400
Deferred interest deadline: 12 months
Interest rate during and after the promotional period: 25%
If the borrower pays off $300 of their $400 balance before the introductory period ends by paying back $25 a month, their deferred interest would be calculated this way: In the first month, the borrower pays off $25 and the credit card issuer subtracts that payment from the $400 balance and notes an interest charge of approximately $8, but they don’t charge it yet.
The next month, when the borrower pays off another $25, the credit card issuer records a $7 interest charge. These interest charges continue being recorded until the 12-month promotional period is over. At that point, the borrower will owe $65 in interest and $100 for their remaining balance.
Going forward, interest will be accrued on the full balance which includes the interest charges from the promotional period.
What to consider before accepting a deferred interest promotion
If you’re thinking about applying for a credit card with a deferred interest offer, here are a few things to keep in mind:
Double-check the end date – Before you take out a credit card with deferred interest promotions, confirm when the offer period ends so you know when you’ll need to pay your balance to avoid interest charges.
Calculate monthly payments – To make sure you don’t get hit with any deferred interest once the offer period ends, sit down to figure out how much you plan to charge and what your monthly payments would need to be to pay off the balance before the offer period ends. Make sure these payments fit in your budget.
Don’t borrow what you can’t pay back – Not having to pay interest can make it possible to charge and pay off a large purchase over time, but it’s important to remember that this loan or credit needs to be paid off. Only borrowing what you can afford to pay back is the best way to avoid paying interest and fees and possibly going into debt.
Plan to check in on your balance – Every month, check your balance to confirm you’re making progress and will be able to pay your balance off in time.
Consider a credit card with a 0% introductory APR instead – Plenty of credit card issuers offer new accounts with a 0% introductory annual percentage rate (APR), which can give you a similar borrowing option without having to pay retroactive interest. Once the introductory period ends, you’ll need to pay interest on your remaining balance moving forward, but you won’t have to make interest payments on your previous balance.
If you already have credit card debt, it’s a good idea to focus on paying that off before taking on another card. Tally† can help you manage your payments with a lower-interest line of credit and it could potentially lower your interest so you can keep moving toward your financial goals. Learn more about how Tally works.
†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.