Deferred Interest Meaning
Deferred interest is the total amount of interest generated on loan but remained 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.
How does it Work?
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 he is 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 interest amount of his or her original purchase irrespective of how much he or she has paid off until then.
How to Calculate Deferred Interest?
Deferred interest can be calculated in the following steps-
Step #1: In the first step, one must determine if his or her deferred interest is offering to suspend interest for a couple of months. This is common in the case of credit cards as well as installment plans for expensive products like furniture, jewelry, home appliances, etc.
Step #2: One must go through the contract and find out if at all, there is no interest in the designated time period mentioned in the contract.
Step #3: One must look for the interest rate mentioned in the contract as well as the amount of time that he or she has for repaying the debt which is taken.
Step #4: In the next step, simply multiply the amount that is owed with the rate of interest and the number of years left for paying the same back. 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 accruesInterest AccruesAccrued Interest is the unsettled interest amount which is either earned by the company or which is payable by the company within the same accounting period., then A will have to pay $200 — 2 years of interest — back in a year, along with the $1,000.
Step #5: Lastly, one must deduct the interest from the interest-free period if at all, the interest doesn’t accrue.
How to Avoid Paying Deferred Interest?
Deferred interest schemes 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 on Credit Cards
Deferred interest 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.
Deferred Interest VS 0% APR
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 sizeable retroactive charge is built for the promotional period.
If the deferred interest loan 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. 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.
If the borrower is unable to pay the deferred interest loan amount in full before the end of the designated time period, then he or she will be bound to pay not just the loan amount but the entire interest amount that has accrued since the very first day.
Deferred payments 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 he or she will not have to pay any amount of interest on the same.
This has been a guide to Deferred Interest and its Meaning. Here we discuss how does deferred interest works, steps to calculate it along with its benefits and drawbacks. You can learn more about from the following articles –