No payments! No interest! You don’t pay anything until next year!
The ads are enticing. Who wouldn’t want to snooze on a luxury mattress or binge-watch shows on a big-screen TV — all without paying a dime for 18 months (or whatever the advertised period may be)?
We’ll focus on retail stores in this article, but an expanding number of places offer this kind of financing, including:
But are the claims for real? Can you really wait more than a year to pay off big-ticket furniture, electronics and more?
And what happens if you don’t have the money at the end of that period?
We’ll explain how the zero-interest credit offers work and how to make them work for you instead of against you.
Are Zero-Percent Offers Really Interest-Free Loans?
Understanding what you’re signing up for when you finance a big-ticket item is a good way to avoid overspending on your purchase — or getting yourself stuck in debt for years.
We’ll start with the difference between a zero-percent interest and interest-deferred offer.
Zero-Percent Interest Offers
Zero-percent interest and interest-deferred offers are alike in that you enjoy a promotional period — anywhere from a few months to a few years, depending on the offer — when you are not required to pay interest on the balance.
If you pay off the balance during that promotional period, you pay zero interest — essentially an interest-free loan either way. Yay!
However, if you don’t pay off the balance, you’ll quickly see the difference between zero-interest and interest-deferred loans.
Unlike the “no payments” you may get with an interest-deferred offer, you must make at least the minimum payment each month on balance transfer cards — or lose the interest rate and incur penalties.
If you have a balance at the end of the introductory period on a zero-interest loan, you’ll start accruing interest on what you currently owe. (For reference, balance-transfer credit card offers are an example of zero-interest promotions.)
So if you transfer $10,000 to a credit card to take advantage of a 12-month, 0% interest period and pay off $8,000 during that time, you’ll start accruing interest on the remaining $2,000 balance when the introductory period ends. In other words, your card starts behaving like a typical credit card with a $2,000 balance.
The advertisements you typically see at retailers are for interest-deferred lines of credit. You apply for the financing through the store, which issues credit through an affiliated financial institution.
For this type of financing, you’re actually accruing interest on the original balance the entire time — it’s just that the amount will be waived if you pay off the entire amount before the end of the promotional period.
A key phrase to look for in your financing contract is: “Interest will be assessed from purchase date.” If your agreement includes this statement, you’re signing up for deferred interest.
Although interest-deferred credit cards are still more common, some retailers — including Walmart — have switched to zero-percent interest promotions. Read the fine print to be sure.
So if you pay off your balance within that time period, you’ve essentially received an interest-free loan.
So how do stores make money on those kinds of deals? They’re depending on your inability to meet a deadline. If you don’t pay off the total amount by the day the introductory period ends, you’ll be charged interest on the full amount — retroactively.
What’s that mean for you? Let’s look at an example:
You buy a $2,000 sofa with a 0% interest/no payment offer for 24 months. After the introductory period, the interest rate is 18%.
On the day before the introductory period ended, you pay off $1,900 of the balance. But you can’t quite come up with the last $100.
When the introductory period ends, you’ll owe the remaining $100 plus the accrued $859 in interest on the original balance. So you went from owing $100 to now having a balance of $959, all of which will start accruing interest at 18%.
What to Do If You’re Offered an Interest-Deferred Loan
Here’s the thing: There’s nothing inherently evil with interest-deferred financing.
It can actually allow you to hang onto your cash while paying off a big-ticket item in installments.
But it requires discipline and a realistic assessment of whether you can pay off the balance in time.
Before you sign anything, take a look at your budget and your savings and ask yourself the following questions:
- Could I put off this purchase and save up the money so I can pay in full instead? Although you’ll be delayed in getting the item you want, paying cash in full eliminates the chance you’ll end up paying any interest on your purchase.
- Can I realistically afford the payments it will take to pay off this item or service within the timeframe provided? Divide the balance by the number of months — and subtract at least one extra month, just in case there’s a month you can’t pay. So if you’re borrowing $800 on a six-month plan, divide $800 by 5 — you should be able to pay $160 every month for five months. If you even hesitate as to whether your budget can accommodate the expense, reconsider this financing option.
- How stable is my income? If there’s any chance you could lose the income you’re relying on to pay off the balance, consider getting a side gig to give yourself more of a financial cushion. (Browse the latest work-from-home gigs in our Work-From-Home portal.)
- Do I have an emergency fund? Unless your purchase is for an emergency expense, you shouldn’t use this money to pay your balance. But emergency funds should be available to cover other unexpected expenses — instead of using the cash you budgeted for your payments. No emergency fund? Prioritize starting one before you make the purchase.
- Have I considered other options? Even taking out a personal loan with an interest rate of 10% will likely offer you a better deal than incurring a much higher interest rate if you can’t pay off the balance on time. If you don’t want to go through a loan application process, consider buy-now-pay-later services like Afterpay or credit card installment plans.
Read the contract carefully for the end of the promotional period — you’ll want to make the final payment well ahead of the deadline to ensure you’re credited with paying off the amount in full on time.
What to Do If You Have an Interest-Deferred Loan
What if you already have an interest-deferred loan? Make paying off the balance your priority.
Start by digging up your agreement — find out the original balance and how many months or years you have left in the promotional period. Create a budget that incorporates the payments you need to make to pay off the balance by your deadline (you can use the formula from #2 in the list above to calculate your monthly payments).
Need an incentive to start paying? Check out your monthly statements, which should include how much interest you’ve already accrued.
Consider cutting from other parts of your budget to add that money to your payments, whether it’s cutting your grocery budget, using administrative forbearance to save on student loan payments or finding other ways to make money and save money.
Additionally, consider cheaper borrowing options that could allow you to pay off the balance. A personal loan could help you create a payment schedule, but if you’re close to a payoff, you might want to consider using a credit card to pay the remaining balance.
Yes, you may end up paying your credit card’s interest rate on the remaining amount — you should compare how much you’d pay in interest on the credit card vs. your loan to decide which is the better deal.
But remember that interest will only start accruing from the day you put the remaining balance on your credit card — not from the moment you made the purchase all those months ago..
Tiffany Wendeln Connors is a staff writer/editor at The Penny Hoarder. Read her bio and other work here, then catch her on Twitter @TiffanyWendeln.