Consider Carefully Before Accepting Store Deferred Interest Offers

Retailers' deferred interest offers, which let you buy now and pay later with little or no finance charges, are tempting, especially during the winter holiday buying season. But if you're not careful, these deals can backfire and end up costing you a lot.

A new study by the website WalletHub found that 82 percent of consumers don't understand how deferred interest programs work. In part, it blames retailers who bury the potential gotchas in fine print that's difficult to find and read.

"Deferred interest financing is like a wolf in sheep's clothing, pairing an enticing offer – something like 'no interest if paid in full' or 'special financing' – with a clause that allows the deal to turn ugly if you make the slightest mistake," says the study, which was based on a review of 73 large retailers' financing programs. 

Deferred interest financing usually is offered in connection with retailer credit cards, though it also may be a feature of a stand-alone finance agreement. Customers can make one or more purchases, often with little or no money down, and pay zero percent interest as long as they make their payments on time and pay everything off the end of the special financing period. That date can be as little as six months away or as many six years in the case of big ticket items, such as furniture.

And there's the catch. If you pay late or have a balance after the end of the special financing period, you'll likely be charged full interest that's retroactive to the date of purchase. And depending on your credit rating and the retailer, the rate can be as high as 30 percent.  But that danger often isn't obvious, say the study. "Retailers typically don't list the regular APRs of deferred interest plans in (a) large enough font or in a prominent location," it says. 

Many major retailers offer deferred interest financing plans, among them Amazon, Apple and Dell, Bed Bath & Beyond, Best Buy, Home Depot and Lowe's and Mattress Firm. 

The study found that 79 percent of those who understand how deferred interest plans work think they are unfair, and 62 percent say the offers should be illegal. WalletHub says that 88 percent of deferred-interest retail credit cards are issued by just three banks, Synchrony, Comenity and Citibank.

What to Do

Use caution if a retailer offers you a zero- or low-interest financing deal. There's a good chance it's a deferred interest plan that could leave you paying full, retroactive interest if you're not careful. 

Wallet Hub says there are better ways to finance purchases than by taking deferred interest offers,. One option, it says, is to apply for a true zero-percent credit card, which doesn't threaten you with retroactive interest. Instead, those cards let you make purchases (and sometimes balance transfers) that are interest-free for a year or so, after which the standard interest rate will apply only to any remaining balance. 

Better yet. Try not to spend more than you can pay often a single month, especially during the holiday season. Make a realistic budget and stick to it. Be sure that it includes savings. Having a substantial amount stashed away can help you avoid going into debt during those periods when your monthly expenses can exceed your income, such as during the holidays. Remember, with any type of financing, you're essentially spending tomorrow's income today. And if you're already having trouble meeting your expenses, taking on debt, or adding to the amount you already owe, is likely to make things worse (more on that in a later blog).  

If you feel you must accept a deferred interest financing offer, be sure to make every payment on time and pay off the entire amount due by the deadline. Keep in mind that that find print on many retailer sites says that paying the minimum amount required under the plan won't necessarily mean that the full balance will be paid off at the end of the zero-percent financing period. So pay close attention.