When you're making a major purchase, the promise of "no interest if paid in full" from a deferred interest promotion can seem incredibly appealing. However, these promotions come with a major catch that can end up costing you dearly if you're not careful.
How deferred interest promotions work
With a deferred interest promotion, you are charged no interest for an introductory period, usually 6-24 months. However, the interest is still accruing during this time. If you pay off the full balance before the promotional period ends, you won't owe any interest.
But if you have even $1 remaining on the balance when the promotion ends, you'll be charged all of the deferred interest going back to the original purchase date. Depending on the size of the purchase, these retroactive interest charges can add hundreds or even thousands to your total bill.
Avoiding the deferred interest trap
Before signing up for a deferred interest promotion, make sure you understand the terms and have a plan to pay off the full balance before the 0% period expires. Consider setting up automatic payments to ensure you don't miss the deadline.
Also look at alternative financing options that may provide more favorable terms:
0% Intro APR credit cards. These charge no interest for an introductory period, but don't retroactively charge deferred interest if you have a remaining balance when the 0% period ends.
Home equity loans. These use your home's equity as collateral, providing a lower interest rate that stays fixed during the repayment period.
Personal loans. An unsecured personal loan will have a fixed interest rate and payment schedule, avoiding deferred interest pitfalls.
The convenience of deferred interest promotions can easily backfire, sticking you with much higher costs than expected. Explore all your financing options before putting a big purchase on deferred interest to ensure you don't get stuck with a nasty surprise.