As holiday shopping begins, retailers are offering a variety of financing options for big purchases, and one of the most common options is known as deferred interest.
Many consumers tend to not understand exactly what the term means, but once they do, they tend to distrust it, according to a new survey from WalletHub.
With deferred interest, the idea is that after you make a big purchase, you have a window of time, often about six months, in which you pay either no interest, or a highly reduced interest rate on your purchase, sort of like an installment plan.
The offer often goes something along the lines of “No Interest if Paid in Full” by a certain time. But if you don’t pay off the purchase in the allotted time, you could potentially face an annual percentage rate so exorbitant that any savings get effectively nullified, at best.
With deferred interest, the interest charge will often reflect the entire cost of the purchase, not the amount of money you still owe.
An example provided by the Consumer Financial Protection Bureau: You buy a television that costs $400 with a deferred interest rate of 25%, and with a minimum monthly payment of $25, you manage to pay $300 out of that $400.
In this case, the store would record your monthly interest charge for the $25 monthly payment, but it won’t charge you that interest until the promotional period is over.
So if you don’t pay off the purchase in time, you could both owe the $100 that is still due on the purchase, plus a high interest charge of around $65 or higher.
This is different from a zero percent interest promotion, in which you are given a period of time to pay off a purchase, but you aren’t charged extra interest on the purchase.
According to a WalletHub survey, 56% of people don’t know how deferred interest works.
But once consumers understand the practice, they largely dislike it. The survey found that 77% of people who understand the practice think it is unfair, 65% of people would think negatively of a store that charged deferred interest, and 69% of people who understand the practice think it should be illegal.
But while it may be disliked by the people who understand it, plenty of stores still offered deferred interest on purchases, including the following retailers: