Be Aware of Deferred Interest Financing
When you need a new washing machine or new dryer or you decide some new furniture is overdue, you may be overwhelmed by 0% financing offers by the appliance stores or furniture stores.
These 0% financing offers could be in the form of store credit cards or as a loan from a 3rd party lender; and a lot of these are deferred interest financing, which is something consumers need to be very careful with.
Trap: Back Interest from a Missed Payment
These 0% financing deals are really deferred interest loans. Deferred interest means you won’t pay interest on the purchase as long as you pay off your balance by the end of the deferred interest period (6 months or 12 months or whatever the offer was) and as long as you don’t make any late payments.
Let’s say you made payments regularly for months, then in month 8 of the loan you missed the payment date. Usually, a late payment will mean the lender is going to:
- charge the interest on all of the previous months’ payments retroactively
- and charge you interest until you pay off the balance in full
- And the interest rate will jump from 0% to something outrageous – usually in the 25%-30% range
If you are late on a payment just one time, that will be an expensive mistake.
Trap: Deferred Interest
If you haven’t paid off the balance for your purchase by the time the deferred interest period ends, the lender likely will require you pay the deferred interest from the entire length of your loan. It depends on the actual lending agreement, but this is typical.
AND once again, that interest rate that is charged will usually fall somewhere between 25%-30%.
That is huge.
Can you do it?
If you are sure you can manage to make payments as required each month and pay it off in the allotted time period to avoid having to pay any deferred interest choices, then this could be a great option.
Just be realistic with yourself.
2 Better Choices
The best choice is cash. With cash you pay no interest and you avoid another debt.
The second option is using a credit card. Personal credit cards are the most convenient way to borrow the money. However, if you are paying on a high interest rate credit card, you may want to apply for a low interest credit card at First Castle.
Making regular monthly payments on a low interest rate credit card could be better in the long run than having to pay deferred interest charges
At First Castle, we offer a straightforward, low interest credit card that is just right for when you know you will carry a balance either short-term or long-term.
It’s important to have a low interest rate to rely on rather than trying to play the 0% interest rate game.