Deferred Interest

Deferred interest is the total amount of interest generated on loan but remains unpaid and such interest gets accumulated when the total amount of loan payment is so small that it is unable to cover all the pending interest amount and therefore increases the principal balance of a loan.

When the payment of interest gets delayed or deferred due to payment plans for a particular period of time is termed as a deferred interest plan. These are usually advertised as "no interest charges until" a particular date, and once that date is crossed, interest starts to accrue, and since then, the interest from the date of purchase is charged to that account.

• Deferred interest refers to a financing arrangement where interest charges on a loan or credit purchase are temporarily postponed or "deferred" for a specific period.
• During the deferred interest period, interest accumulates on the loan or credit balance, but the borrower is not obligated to make interest payments. Instead, the accrued interest is added to the principal balance.
• Lenders or retailers frequently offer deferred interest as a promotional or introductory feature to incentivize purchases or loans. It allows borrowers to postpone interest payments.

Deferred interest is one of the most commonly used methods which is used by lenders to sneak additional charges with respect to the so-called zero interest deals. Such an arrangement allows the borrower to pay minimum interest for a temporary period in comparison to what lenders actually charge.

This must also be noted that the borrower might pay a lower rate of interest only if they are able to repay the loan amount before the end of the promotional period. If the deadlines are missed, then the interest charges start to pile up. The borrower might even face compulsion to pay the full deferred interest charges of their original purchase irrespective of how much he or she has paid off until then.

Deferred interest payment are usually marketed as no interest charges until a designated time period, and after that date, interest starts accruing, and then the borrower will have to pay the interest that started to accrue from the day of purchase. If the borrower is able to repay the deferred interest loan amount within the stipulated time period, then they will not have to pay any amount of interest on the same.

Let us go through an example to understand the concept.

For example, A purchased a $1,000 couch at 10% a year and has two years to pay; then A will have to pay $200 in interest, which will be calculated by multiplying the purchase price with the rate of interest and number of days left, i.e., 1,000*10%*2. If the amount of interest accrues, then A will have to pay $200 — 2 years of interest — back in a year, along with the $1,000.

Deferred interest loan can be spotted when there are offerings that state “zero interest for twelve months” or “same as cash.” Borrowers do have the option and choice to avoid paying deferred interest, but doing so is really complicated. Such programs are very common when the borrower uses in-store financing or uses store credit card offers. These programs are common in the cases of expensive products like furniture, jewelry, and home appliances. These programs can be mostly seen in abundance during winter holidays since it becomes easy for the retailers to convince buyers to spend extra money on purchasing gifts and pay later. High-end credit card companies and online retailers are also seen in making these offers.

Deferred interest loan allows the buyers to purchase with their credit card without having to pay interest on the remaining balance. Deferred interest on credit cards can help buyers shop on their credit cards at the moment, and they will not have to pay the monthly interest, which will keep accruing after the collapse of the promo period.

If the balance is paid before the promo period has ended, then the buyer can avoid paying interest altogether. But if he fails to repay before the intro period ends, then he will be bound to pay all the interest that has accrued since the very first day.

A 0% APR offer is different from deferred interest. In the case of 0% APR, one will not need to pay any amount of interest, and the interest shall only start to accrue once the promotion ends. If there is a minimum balance left at the end of the offer, then the interest will incur on that small amount only whereas, in a deferred interest loan, a sizable retroactive charge is built for the promotional period.

Just like any other financial concept, this concept also has its own advantages and disadvantages. Let us try to understand the advantages, as given below:

• If the deferred interest mortgage is paid fully by the borrower within the stipulated time period, then the borrower will not have to pay the interest amount on the same. This means that the borrower get some extent of financial flexibility and can allocate their funds to some other useful purpose.
• The benefits of deferred interest could only be reaped by an individual if only he or she is able to pay back the total amount of deferred interest on the loan before the end of the designated period.
• The arrangement lowers the monthly installment payments during the deferral period since the borrower does not have to pay the interest amount. This makes the payment more manageable.
• Deferred interest is often used as a promotion or an incentive to attract clients. Consumers can make large purchases immediately.
• The borrowers can use the deferred interest amount to invest in sources that provide good returns.

This concept come with some limitations too. Let us understand them in details.

• If the borrower is not able to pay off the interest during the deferral period, then the accrued interest gets accumulated with the principal and results in the magnifying the final payment.
• Sometimes this kind of deferred interest mortgage comes with high rates. Lenders compensate the time gap by charging higher rates. Therefore, the borrowers should be careful while accepting such system.
• Accepting such a payment system needs some financial discipline. Regular payments should be made to pay off the interest before the deferral period. Failure to do so leads to higher rates, penalty and loss of credit score.
• The system may provide a short-term flexibility but may restrict the borrower from making any changes in the payment schedule or modify the agreement in any way.
• The borrower may end up taking more loans to meet the obligations of the deferred interest if they are not able to pay up the amount on time. Thus, it is extremely important to be careful and be certain about one’s creditworthiness.

This has been a guide to what is Deferred Interest. We explain interest on credit cards along with example, how to calculate & how to avoid. You can learn more about from the following articles –

• Create an Amortization Schedule for a Mortgage
• Compound Interest
• Formula of Accrued Interest
• Mortgage Calculator
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