Deferred Interest Pitfalls
Interest-free financing can be very tempting if you need a big-ticket purchase, unexpectedly. However, if you aren't careful, that easy solution can become a difficult problem.
Deferred interest pitfalls can be numerous and unforgiving.
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Let's say you get a new washer under a deferred interest financing plan and you make all of the payments on time. However, for whatever reason, your final payment is a dollar short and you don't realize it. The next month, you'll get a bill for that dollar, plus all of the interest that accrued on the loan during the deferment period.
Under the terms of deferment deals, the interest is mounting in the background and if you don't pay the loan off in full by the due date, you'll be on the hook for all of the interest too.
Higher Interest Rates
The scenario above can be particularly debilitating because the interest rate on deferred plans tends to be considerably higher than standard financing. In essence, you're betting the lender you can pay off the loan before the deferment period ends. If you lose that bet, you'll pay them all of the interest they would have gotten, plus the amount of the purchase. And, if that number is so big you can't pay it off in one month, you'll then begin paying interest on the interest.
Payments Might Not Go to the Deferred Balance
Let's say you get a deferred interest card offer that covered your initial purchase only.
(And yes, deals can be structured that way—always read the fine print!)
You then continue using the card to make other purchases. You make all of your payments on time, thinking they're going to reduce the deferred balance—but they are not. The law requires any payments you make to go to the highest interest rate balance first. Since the interest is deferred on that first purchase, it won't count until the deferment period ends. You think you're paying it down, but you're not. Then you get hit with the full interest charge.
Avoiding These Traps
If you opt for a deferred interest card, read the details very carefully so you know where your payments are going. If the deal defers interest only for the initial purchase, do not use the card again until that debt is repaid.
Pay it off as soon as possible. Don't wait for the deferment period to loom large and try to pay it all at once. As ridiculous as that sounds, some people try to do it, only to get stuck when an unforeseen event imposes a significant expense.
If you find you're having trouble making minimum payments on your cards—or you see a situation forming in which you won't be able to pay your debts, get in touch with a company like Freedom Debt Relief to work up a strategy for dealing with it.
Insist upon paper statements. These are easier to read and study for fine detail. It's easy to gloss over key details with electronic statements.
Sometimes moving the balance to a zero-percent card is a good move, but these can have pitfalls too, so be careful with this option.
Deferred interest pitfalls notwithstanding, they can be advantageous deals as long as you keep an eye on them and take some time to understand all of the implications. If you aren't careful with these cards, you could wind up paying thousands of dollars more than you anticipated for a relatively simple purchase.