You are preparing to make a large purchase, and you are presented with an incredible offer. You have the chance to make your purchase with a 0 percent rate for 12 months, so why should you pay the entire amount right now? You feel very smart about signing up for this offer.
However, before you begin to feel too overly smart, are you aware if the 0 percent offer is really waived or deferred interest? This makes a huge difference and is something that isn’t understood very well.
I receive emails on a regular basis and talk with individuals who don’t fully understand what the difference is and were shocked when a large interest charge made an appearance on their statement.
If a store is offering you 0 percent financing it is deferred interest most likely.
Just imagine you are at an Apple store shopping for a new MacBook. You make the decision to take advantage of an instant credit offer of 0 percent for 12 months. It costs $1,000. (Yes, we are aware of the fact that a new MacBook costs quite a bit more than that. We are just using a nice round number for illustration purposes to make the math easy.)
Whenever you take on deferred interest financing, what you really are doing is opening a new credit card. Barclaycard (BCS) actually manages this particular credit card. This card’s interest rate is a shocking 26.9 percent or 22.9 percent, depending on what your creditworthiness is. Let’s make the assumption that our credit is excellent, so you receive the 22.9 interest rate.
Your $1,000 balance during the first month will have accrued to around $19 in interest. This is deferred interest. Barclaycard will be tracking this number even though they aren’t charging you the interest currently.
$20 Per Month Will Only Get You So Far
Assume that every month you are making a $20 payment. After the first month, your $20 payment would result in your balance being reduced to $980 from $1,000 because during your deferral period interest is ignored.
You will make $240 in payments over a 12 month period, which will reduce your balance down to $760. That sounds good so far. However, by the 12th month, you will have a total of $250 in deferred interest.
In month 13, Barclaycard will add $205 onto your balance, which is 12 months worth of deferred interest.
The only way of avoiding interest charges is paying the balance off completely during the initial 12-month period. So you wouldn’t have to pay any interested if you pay $83.33 a month for 12 months. However, if the balance isn’t paid off in full prior to the promotional period ending, you will charge interest like you hadn’t ever had the promotional offer.
This is a common practice among stores. Home Depot (HD) and Walmart (WMT) for example offer deferred interest products that are very similar to our example (via Citibank and GE). If a retailer offers you 0 percent finances, there is a very high chance that it is deferred interest you are being offered.
If you would really liked to have interested waived on something you purchase, that is a possibility. However, there is some planning that you will need to do. In banking it is a common theme. It is possible to get a good deal if you plan ahead. If you are at the checkout counter reacting to an offer, most likely the deal you get will be a bad one.
Whenever a major credit card is offering 0 percent interest on purchases during a set period of time, usually this is waived interest. Chase Slate (CCF), for example, offers 0 percent for 15 months on purchases. During those months, interest is waived. During month 16, this interest rate will be increasing from 0 percent up to whatever the standard annual percentage rate is for purchases (usually ranging from 12.99 up to 22.99 percent).
Assuming you decided you wanted to finance your purchase from Apple. However, instead of accepting the offer that the Apple Store gave you, ou instead apply in advance for the Chase Slate credit card. You then use the Chase Slate card for purchasing your Apple products.
Just as in our earlier example, you will be paying $20 a month. Your balance will be reduced down to $700 in 15 months.
This is where you will be seeing a big difference. Starting in month 16, interest will be charged to you on a go-forward basis. Assuming your interest rate is 22.9 percent, in month 16 you will be charged around $13 in interest. On the other hand if your Chase credit card had been a differed interest product, then in month 16 your charge would have been more than $250.
Avoid Any Surprises
When financing a purchase using a 0 percent special offer, and you pay your purchase off in full prior to the time the 0 percent promotion has ended, then you won’t be paying any interest. It is the same situation whether your are paying deferred or waived interest.
However, if you fail to pay the balance off in full prior to the end of the promotion, there is a big difference between the two. With a deferred interest product, you’ll get stuck with a huge interest charge once your promotional period has ended.
Avoiding the trap of deferred interest:
– Only purchase what you really can afford. If you’re needing to borrow money in order to purchase an Apple iPhone, then chances are you shouldn’t buy it in the first place.
– If you are attempting to be clever (through making use of 0 percent financing while at the same time having money in your savings account), be sure to pay the balance off before the promotional period ends. Otherwise, you’ll be made to look very foolish.
– If you will be unable to pay a deferred interest product off prior to end ending of the promotional period, then consider a balance transfer. In order to qualify most likely you are going to need at least a 700 credit score. Make sure to give yourself an entire month to get everything set up. Citibank Simplicity offers 0 percent for 18 months, with a fee of 3 percent. Chase Slate allows you to transfer your remaining balance and not have any fee for 15 months. We provide you with an up-to-date list at the MagnifyMoney site on all of the best options for balance transfers.
Just allow me to be clear. In my opinion, usually deferred interest products are very bad deals for consumers. Many consumers don’t really understand how these products work, and it results in them getting hit with huge interest charges. When I have discussions with salespeople (the ones attempting to push these offers), usually they don’t understand them very well either.