A popular payment plan offered by America’s big-box retailers promises no interest on your purchase if you pay it off in, say, six months.

It sounds great, at least until you read the fine print.

In “deferred interest” plans, consumer advocates say, bad things happen to the customer who fails to pay off the full balance by the time the promotional clock runs out.

If even one dollar of debt remains at the end of the promotional period, the deal is off. Suddenly, the consumer owes every penny of the deferred interest, often at a steep annual rate of 30% or more. It’s as if the zero-interest promotion never existed.

Deferred interest “is a trap,” said Odysseas Papadimitriou, founder of WalletHub, in an interview. “And major retailers and major brands go along with it.”

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62% of Americans say deferred interest should be illegal

A majority of Americans, 62%, say deferred interest should be illegal, WalletHub reported last month in a Deferred Interest Study. The finding comes from a representative survey of about 250 Americans.

Many of the nation’s largest and most trusted retailers offer deferred interest, the WalletHub study found, from Amazon to The Home Depot to Best Buy. Many others do not, including Walmart, Target and Costco.

Deferred interest promotions abound during the holidays, a time when desperate consumers try to stretch their budgets beyond their available cash.

With deferred interest, the shopper generally puts a large purchase on a store credit card. The buyer may have six or 12 months to pay off the balance without owing any of the attendant interest.

But the interest accumulates, all the same. And if the buyer misses the payoff deadline, it all comes due.

The idea of paying interest on debt that you no longer owe is “completely counterintuitive, and completely opposite to anything that one would expect,” Papadimitriou said.

Imagine buying a new refrigerator for $1,800 using a deferred interest offer of no interest for 24 months, at an annual percentage rate of 25.99%. If you pay $75 a month for each of those 24 months, you should be able to repay the full balance and avoid the interest. Miss a payment or two, however, and you will face an extra $900 or so in interest charges when the 24 months are up. The calculations come from Bankrate, which supplied the example.

For savvy borrowers, consumers with high credit scores and those with comfortable cashflow, deferred interest can be a valuable tool, finance experts say.

"The best way to use one of these [plans] is probably for a big purchase that you're confident you can pay off, but you need a little more time," said Ted Rossman, a senior industry analyst at Bankrate.

Consumers spent more than $60 billion on deferred interest purchases in 2020, the latest available data, according to the Consumer Financial Protection Bureau. The largest share went to home improvement.

“Deferred interest programs are popular with consumers and are beneficial to Americans who must make an unexpected purchase—like a car repair or new home appliance, but don’t have the money to pay for it at that moment," said Sarah Grano, spokesperson for the American Bankers Association. "Customers benefit from having the opportunity to pay over time and can avoid paying interest. It also allows them to avoid turning to even more expensive forms of credit.”

Deferred interest financing is 'designed to be complicated,' advocates say

About four-fifths of consumers who use deferred interest manage to pay off the debt by the end of the promotional period, thereby avoiding the interest, according to the federal agency.

For subprime borrowers, with lower credit scores, the statistics aren’t so good. Only about three-fifths evade the interest “trap.”

“Yes, some people are able to use it and not pay deferred interest, but a lot of people aren’t. They tend to be the most vulnerable consumers,” said Chi Chi Wu, a senior attorney at the National Consumer Law Center.

“It’s a complicated setup, and it’s designed to be complicated, to trip people up.”

Three-fifths of consumers don’t understand how deferred interest works, according to the WalletHub survey. Most consumers who do understand it think it is unfair.

A typical deferred interest plan, offered by Best Buy, promises “no interest if paid in full within 12 months,” or 18 months, or 24, depending on the size of the purchase. After the promotion expires, the variable interest rate could range as high as 31.49%.

Many consumers read a deferred interest pitch and assume the interest doesn’t begin until the end of the promotional period, said Chuck Bell, a financial policy advocate at Consumer Reports.

“They don’t understand that the interest is retroactive,” he said.

“We view it as a pretty risky product, because people often miss the details about how the terms work, and then they’re unpleasantly surprised by the amount of interest they have to pay.”

'Such products should be illegal'

In a June 2023 complaint to the Consumer Financial Protection Bureau, one Maryland consumer recounted using a credit card from Synchrony Bank to finance a home improvement project. 

The card “was advertised as an interest-free card,” the Marylander wrote, and the consumer did not realize the interest had only been deferred. “There were no warnings about the end of the deferred period online.”

Only when the promotional period ended did the consumer discover that the balance due had risen by $5,700 in deferred interest.

“Such products should be illegal,” the consumer wrote.

Synchrony Bank responded privately to the consumer’s complaint, which has since been closed, according to the federal agency.

Deferred interest ranks as “one of the worst abuses that are left” in the credit card industry after the watershed Credit CARD Act of 2009, said Wu of the National Consumer Law Center.

That measure added new consumer protections against surprise interest-rate hikes and excessive fees. The act also barred card issuers from charging interest on debt that consumers had already repaid.

Consumer advocates have sought a ban on deferred interest

But federal regulators created an exception for deferred interest, Wu said.

The consumer watchdog group has asked regulators to ban deferred interest “at least a half-dozen times,” she said. “Obviously, we don’t like it.”

She and other critics contend that deferred interest is designed to discourage consumers from meeting the terms of the promotion.

“Nowadays, you don’t even sign on a piece of paper,” Wu said. “You sign on an iPad. You think you’re just getting a no-interest payment plan.” With default electronic statements, “you don’t even get a bill in the mail.”

A consumer who makes the minimum payments on a deferred interest purchase may not repay the full balance in time to escape the interest. The promotion may expire on a different date than the one when the monthly payment is due, another potential pitfall.

“They don’t want you to pay off the balance by the end of the introductory period,” Papadimitriou said. “They want to make some money by charging you the interest.”

If you’re wondering now about alternatives to deferred interest, here are a few:

Get a zero-interest credit card

A 0% APR credit card often allows the holder to carry a balance for 15 or 18 months without accruing interest. When the promotion ends, interest kicks in -- but only on the debt that remains on the card. Nothing is deferred.

“That’s a key difference between deferred interest and the way a lot of zero-interest credit cards work,” said Rossman of Bankrate.

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Consider buy now, pay later

Buy now, pay later functions as an installment loan: you typically pay for your purchase in a series of equal payments.

Some buy now, pay later plans include interest and fees. Others do not, and consumers can shop around. Thus, “it’s not the same level of risk” as deferred interest, said Bell of Consumer Reports.

But it is debt, and some consumers may overextend themselves by relying too heavily on the loans.

Buy something cheaper

“If you’re struggling to pay your bills,” Wu said, “maybe rethink getting a $500 gift.”