Unveiled Truth About Deferred Interest vs. Zero Interest Promotions

Deferred Interest vs Zero Interest

Do you receive a ton of promotional offers for no interest financing?

If you do, then you are not alone. Many of us are inundated with these promotional offers. So how can you determine if any are worth your time to explore?

Speaking from personal experience, what has tripped me up in the past is deferred interest vs. zero interest promotions. Not fully understanding the terms and conditions ended up costing me hundreds of dollars more.

Let me explain.

Choosing the Right Credit Card Offer

Many years ago, I purchased some furniture on credit. I knew the balance I was financing, the number of months it would take to pay the loan in full, and the interest rate. What I didn’t realize was that the promotion I was receiving was for a deferred interest offer.

You see, I walked into the store because I saw an ad for 0% financing for 12 months. I knew I wasn’t planning to spend a large amount on furniture, so I could definitely pay off the balance in 12 months. The offer sounded like a no-brainer to me. I would simply pay a little more than the minimum payment each month to pay off the balance in full before the interest rate kicked in.

Fast forward 12 months. For the most part, I had followed my plan to pay a little extra each month on my balance. However, there was one month when I had to pay for an unexpected car repair, so I only paid the minimum balance. 

I figured, no big deal. I’ll just have to pay interest on the small amount left over after my 12 months 0% interest promotion is over. Nope, not the case. In month 13, I received a bill from the financing company for every single penny of interest that would have been paid on the loan at the non-promotional interest rate. Imagine my surprise when I thought I’d have another $50 or so to pay, but I actually had almost $300 more to pay.

Needless to say, I was completely confused. So I called the financing company looking for an explanation and boy did I get an earful.

Deferred Interest Promotion

What is a deferred interest promotion?

You see, I had apparently signed up for the deferred interest promotion, which meant if my balance wasn’t paid in full by the end of the 12-month term, I’d be charged all the interest that would have calculated from day 1! 

Yup, that’s right, because I didn’t pay off the loan in full by the time the introductory period was over, the company took the original loan amount, applied the new interest rate to that amount, then add that interest to my account balance.

Now, if I’d understood what a deferred interest promotion was, there was no way I would have neglected to send that extra $50 to pay my balance in full by the end of my 12-month term. But I didn’t. 

Deferred interest promotions can be very appealing because they typically offer a super low rate, often 0%, for a specific length of time. 

The good thing is, if you know you can pay off the total balance within the promotional time frame, then you’re good. The bad thing is if you don’t know that, or if you aren’t able to pay the entire balance in time, you can have a considerable charge staring you in the face. 

Check this out; here’s an example.

Example of Deferred Interest

Let say your original loan balance is $2500. Assume a 0% introductory rate for the first 12 months. After the initial period is over, the rate becomes 17%. In this example, let’s say your minimum payments are $80 per month. However, you want to take full advantage of the introductory rate, so you pay $210 per month to be sure to pay off the balance in full before your introductory period ends. 

But, in month 10, you fall on some hard times and can only make the $80 minimum monthly payments going forward. By the end of 12 months, you will have only paid a total of $2260. That would leave your balance at $240. 

Well, with a deferred interest promotion, you would be charged an extra $425 (which is 17% of the $2500) in addition to the $240 balance remaining.

Not a fun time, I can tell you from personal experience.

That said, deferred interest promotions can be very beneficial if you need to make a purchase but don’t want to accumulate interest to do so.

However, a much better alternative is the zero-interest promotion.

0% Interest Promotion

What is a zero-interest promotion?

A zero-interest promotion is what I actually thought I was getting when I purchased that furniture! 

With this type of promotion, interest is only charged after the promotional period has ended and ONLY applied to the balance at that time. So, in my case, had I had a zero-interest offer, I would have only paid interest on the remaining $50 or so dollars I had left on my balance.

While a zero-interest promotion offer seems like a better choice, drawbacks are similar to deferred interest offers.

Deferred vs Zero Interest Promotion

Deferred Interest vs. Zero Interest Pros and cons

The major advantage of either offer is that you can save money by not paying interest on your purchase if you stay within the promotional term. This can be an effective way to help manage debt while also helping to build credit.

On the other hand, both promotional offers have a few drawbacks that are cause for concern. One major disadvantage is that payoff dates and the due dates may not align. This can be very confusing because you can easily misjudge how much and when to pay off your balance.

Another disadvantage is that using the credit card you have a balance on that is associated with a promotional offer could result in you managing two different balances. One balance would be subject to the terms of the promotional offer, and the other subject to a completely different interest rate. This can also be very confusing if you’re trying to ensure your promotional balance is paid in full by a specific time.

I could go on and on about credit card advantages and disadvantages, but you can also find more info here on the subject.

To Conclude Deferred Interest vs. Zero Interest Promotions

We’ve all been there. Promotional offers often flood our mailboxes and email boxes. Selecting the best offer comes down to this – do your research, read and understand ALL terms before signing up for any offer, and limit your usage of deferred interest credit cards and loan offers.

Because the terms of a deferred interest credit card or loan offer can be so unforgiving, it’s best to either avoid them or be very careful when using them.

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Krystal Norwood-Morales, MBA, CFEI

Krystal is a Certified Financial Education Instructor and founder of Wild About Wealth, LLC. As a financial literacy advocate, she writes posts geared toward helping others improve their financial education and build generational wealth.

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Krystal Norwood-Morales, MBA, CFEI

Personal finance blogger

As a certified financial education instructor and financial literacy advocate, my mission is to teach young adults how to build generational through financial education. So let’s get WILD about WEALTH!

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