What is Deferred Interest?
You’ve probably seen ads on TV or received offers in the mail advertising no interest for a specific period of time if you apply for a certain credit card or loan. This type of tempting offer is known as deferred interest. Deferred interest plans are most often associated with store credit cards, but they are also available for other types of credit cards or various loans – most often mortgages.
In terms of credit cards, if you are told you don’t have to pay any interest for 12 months, you won’t need to pay as long as you pay off your balance for the purchase by the end of the deferred interest period (12 months in this case). If you make any late payments or don’t pay the balance in full during the allotted time period, you may have to pay the full amount of interest you expected to be deferred.
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The credit card company is required to tell you the date by which you must pay off your balance to avoid being charged deferred interest. The information will be clearly displayed on the front page of your statement and the deferred interest purchase may even be shown as a separate balance from other purchases on which you can’t defer interest.
In the example outlined above, where interest is deferred for 12 months, what happens if you fail to pay the full balance within the 12 month period? Well, you will be charged interest for each month on the balance you owed in each of the 12 months. In other words, in order to avoid paying interest you want to avoid, be sure to pay off your deferred interest balance before the deferred interest period ends. Do your best to pay more than the minimum payment each month in order to pay off the balance as quickly as possible.
Deferred Interest on Loans
When you get a loan, you typically make monthly payments and part of that payment represents interest. Over time, your balance on the loan decreases. However, when it comes to a deferred interest plan, your outstanding balance does not decrease as months or years go by. If you have a deferred interest mortgage or adjustable rate mortgage, you will have a payment cap but your interest rate increases. With deferred interested, your debt increases, because the difference can be added to your balance.
Deferred interest can pose a problem if it causes you to owe more on your home than it’s worth (being upside-down in your mortgage). If you find yourself in this type of situation and you want to sell your home, it can be quite difficult or nearly impossible to do so. On the other hand, a deferred interest mortgage can be a good thing if you’re expecting a substantial salary increase in the near future. Once you make more money, it will be easier to afford the higher payments over the life of the loan.
Options for Debt Consolidation
For people who find themselves in over their head financially, debt consolidation is an attractive option. By consolidating your debts into one loan at the lowest possible interest rate, your debt does not grow as fast and a greater amount of each payment you make covers the principal versus the accrued interest every month.
It is important to choose the right debt consolidation program for your situation, because if you don’t choose wisely, you could actually increase your monthly payments or pay more in added interest before the debt is paid off. Plus, your credit could be damaged if you don’t complete your consolidation plan or make all payments on time. If you are interested in debt consolidation, be sure you manage the payment plan, so you do not accrue fees or more interest. The goal of consolidation is to avoid taking on more debt.
Many people consider debt consolidation when they have a significant amount of credit card debt. The ease of buying things on credit can be a dangerous trap, because you may not consider whether you can really afford what you’re buying. After failing to pay several bills, you could be facing some serious debt. However, consolidating debt alone does not get you out of debt. In many ways, consolidation is a quick fix for a much larger problem. If you truly want to break the cycle of debt, you need to get your spending habits under control.
