A deferred-interest loan comes with the promise of free financing if you can repay your loan before the promotional period ends — usually within a year. But make sure you understand all of the terms and conditions before you sign up. Misunderstanding the rules could mean you'll end up paying more than you expected.
What is deferred interest?
Deferred interest is interest that doesn’t start accumulating until after a promotional period. Usually this runs from six to 12 months on loans — and up to 21 months on credit cards.
Deferred interest is most common when you sign up for in-house financing on a big-ticket item. You’ll find these loans at retailers, doctor’s offices or hospitals and car dealerships — and they’re particularly popular around the holidays.
Banks, credit unions and online lenders typically don’t offer these kinds of deals.
Is deferred interest the same as a 0% APR offer?
No, a deferred-interest loan is not the same as a true 0% APR loan. This also applies to credit cards that have a 0% promotional offer.
A 0% APR loan would never charge interest or fees at any point in time. Usually, they’re only available to people who need financial assistance. For example, some states, local governments and private organizations offered 0% APR loans to individuals who lost income due to COVID-19.
How does deferred interest work?
Deferred interest works by holding off on interest during a promotional period — typically six to 12 months. If you pay off the loan during that period, you won’t pay any interest at all.
But once that period ends, interest starts to add up. How this works depends on your contract. Usually, deferred-interest loans come with higher rates than you’d find on most personal loans. It’s not uncommon for deferred interest rates to top 20% — closer to what you’d pay with a credit card.
Can you still end up paying interest?
Yes, if you don’t repay the loan in full by the end of your promotional period, you will pay interest on the remaining balance. At the very least.
Some deferred interest contracts will charge retroactive interest — as if you had been charged interest from the day you took out your loan. Making a late payment or otherwise violating the contract can also trigger interest in some cases. Don’t sign up for a deferred-interest loan without fully understanding the terms and conditions.
Does deferring interest hurt your credit?
A deferred-interest loan won’t hurt your credit score if you make repayments on time. Even if you don’t fully repay the loan before the promotional period is up, it can still improve your credit by adding to your history of on-time repayments.
But if you don’t budget for a repayment that includes retroactive interest, you might miss multiple repayments and damage your credit. Don’t count on repaying the loan before the promotion is up. Get an estimate of the cost after that period to avoid missing a repayment and damaging your credit.
See personal loan options without deferred interest
Use the table below to compare lenders that don’t offer deferred interest on their loans. Select your credit score range and state to find out which lenders you might qualify with.
Pros and cons of deferred interest
Deferred interest might seem like all benefits at first glance. But there can be some major drawbacks. Here’s how you can benefit from these loans — and why you might want to stay away.
- Potential interest-free loan. Repay it before the promotional period is up — according to the terms and conditions — and you’ve got yourself interest-free financing.
- Easy financing. In most cases, deferred-interest loans are available at check out when you’re paying for your big ticket item.
- Manage expensive purchases. Like any loan, deferred-interest financing breaks up a big ticket item like a car into more manageable repayments.
- Potential retroactive interest. In some cases, you could end up paying interest on the original balance of the loan.
- Typically higher rates. While rates on your average personal loan hover around 10%, interest on these loans can be 20% or higher.
- Few opportunities to compare options. Deferred-interest loan offers are often presented at checkout — when you might not have the chance to compare other deals.
A deferred-interest loan can be better than it seems — and it’s a risk. Even if you think you can pay off the loan within the promotional period, there’s a chance something will happen that will affect your future income.
If you don’t pay it off before that 0% APR period is up, then you could end up paying more than you would have with a regular personal loan. Before you apply, compare our top picks for personal loans to see if you can find a good deal without that risk.
Frequently asked questions
Can I defer interest in the middle of my loan term?
In most cases, no. Deferred interest is usually a promotional tool that creditors use to attract new customers. If you’ve already passed your promotional period, you generally have to pay interest on whatever balance is left.
However, in some cases lenders might pause interest on certain loans during an emergency — like the coronavirus outbreak. For example, the Department of Education stopped charging interest on federal student loans in March. But unlike with deferred interest, students aren’t required to pay back interest once repayments resume.
How do I avoid deferred interest?
You can avoid deferred interest by applying for another loan ahead of time. Compare your financing offers before you make your purchase to find a lender that offers rates, terms and monthly repayments that fit your budget. If you find a deal that’s a good fit for you, use the funds from that loan to make your purchase.
How do I fight a deferred interest charge?
If you think you shouldn't have to pay deferred interest, you might be able to fight it. Look at your contract and make sure you’ve followed the terms and conditions before reaching out to the lender. Explain the situation and why you think they’ve made a mistake.
In some cases, it might be an error that’s easy to fix. If you aren’t able to get it changed, consult a lawyer to find out what legal steps are available to you.
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