No Interest for 12 Months? Watch Out: It’s Deferred

posted on: January 17, 2018 category:

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One of the most tempting deals is the “No interest for X months!” deal. Whether you get a pass on interest for three months, six months 12 months or even 18 months, it seems like a great deal. You can get what you want now, on credit, but without all the messiness that comes with paying interest.

It really does help you feel as though you get the best bargain. It’s a way of getting around your guilt about buying things on credit. After all, it’s the interest that makes credit so dangerous and potentially damaging to your personal finances. However, it’s important to remember that just because you are paying no interest for those months, it doesn’t mean that the interest isn’t accruing.

Deferred Interest

If you actually make a plan and pay off your no interest for X months purchase within the stated time period, there is no problem, for the most part. You have what you want, and you have avoided paying interest. The real problem comes when you don’t get the item paid off within the set amount of time. This is because most retailers will defer the interest.

Most of these promotions work on the principle of capitalized interest. It means that the business will defer the interest until later, adding it in to the total loan when the stated amount of time is up. So if the financing is 9% after as 12-month period of no interest payments, your interest has been adding up for all of that time. If you buy a $1,800 TV at 9% interest, and you don’t pay interest for 12 months, you’re talking more than $160 in interest, which is likely to be added to your total once that 12 months is up.

The interest is still there, accumulating quietly. Whenever you borrow, you can’t escape it.

No Payments

You compound the problem when you take advantage of those deals that offer no payments as well as no interest. No, you don’t have to make payments for however long it is. And no, you won’t be paying interest, either. But in most cases that interest is still accruing. And if you haven’t been making payments, it’s accruing on the full amount of what you borrowed in order to make your purchase. Once your time period is up, you have to begin making payments, plus you will have all of the interest that accrued during the deferment period. (Incidentally, when you defer your student loans, something much the same happens. The interest keeps accruing, and is added to the loan when it is time to start repaying.)

Make a Plan

If you want to take advantage of a great deal, and avoid paying interest, you have to make a plan. As with all personal finance decisions, your plan is important when it comes to financial stability. Instead of putting off making payments, create your own personal payment plan that allows you to pay off the total prior to the end of the promotion term. If you have six months to pay of a TV that costs $1,800, that means you need to make payments of $300 a month. As you are standing in the store, and considering the possibility, realize that if you can’t pay off the item in the “no interest” promotion period, you probably can’t afford the purchase, and should consider cutting back.

You can make your payments in one of two ways. First, you can make your $300 a month payment to whoever financed you, and have that all counted toward the principal so that when the promotion period is over, you owe nothing, and have not paid interest. The second option is to make payments to yourself. You can put the monthly payment into a high yield savings account, earning some interest on it until your time is up. Then, just before all of that interest is capitalized and added to your loan, you can pay it all off. Of course, this second option only works if there is a “no payments” part to the “no interest” deal.

In the end, it’s about being careful and considering your options. Remember that interest is always there, and if you don’t want to pay it, you have to make careful plans and stick to them.

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