Do you want to buy a new $1,500 LCD TV on a 12-month offer where you only get charged interest if you fail to pay off the full amount on time? Be careful. If you're late one day, you could owe hundreds in delayed interest.
How Delayed Interest Plans Work
You aren't required to pay interest during a set time period. However, if you don't pay the full balance on time, you'll owe the accrued interest that would have been charged during that time period. It's delayed interest because you aren't charged each interest month, but it is still accruing just in case you don't fulfill the terms to qualify for no interest.
Example 1: You buy a set of tires for $640 with six months no interest. You take one extra day to make the payment. The interest rate is 24%. You owe about $78 in accrued interest.
Example 2: Let's say someone buys a $3,000 laptop on the premise of no interest for 12 months. The laptop buyer decides to make zero payments until the $3,000 is due, meanwhile keeping $3,000 in a savings account that earns 2% interest. The interest made from keeping the money in a savings account is $60. The balance is paid off one day after and the interest for the full year - at 28% - is now due. The interest now owed is $840. Essentially, you lost $840 to make the $60 earned while in the savings account.
Creating Your Own Payment Schedule
Generally, in a delayed interest offer, you will not have to make any payments as long as you pay the full balance within the specified time period.
However, if you don't want one whopping payment at the end of the period, pick a payment schedule that works for you. You could divide the full amount by the number of months before delayed interest kicks in, pay it off in fewer months or pay it off based on the season if you have variable income.
For the $640 tires used in example 1, you could set a payment $107 per month for six months. For the laptop in example 2, you'd have to pay $250 per month for 12 months.
Since paying off the balance by the final due date is critical, you'll want to have an action plan before you agree to any delayed interest offer.
- Pre-Budget Before You Buy
If you are purchasing an item with a six-month delayed interest offer, plan your budget for at least the next six months - including the payments you will make. (For more on budgeting read, 6 Months To A Better Budget.)
- Set Up Bill Pay When Available
Your bank account will likely let you set up bill payment for months in advance. If your delayed interest payment will come from your savings, you can likely do the same.Set up a bill pay to make sure you don't miss your payment by one day and a get charged accrued interest. You may also be able to set up direct debit payments with the creditor. (Check out Procrastinator's Guide To Bill Payment for more tips.)
- Double-Check Payment Arrival
Always make the final payment at least 10 days before the final payment is due in case your check or bill pay arrives late. Call your creditor at least five days prior to double-check all payments were received.
Avoid Too Many Simultaneous Delayed Interest Offers
Let's say you're buying your first home. If you purchase a bedroom set, a living room set and a dining room set on delayed interest, your eventual payment could get pricey. Buy absolute necessities first such as a dining room table, a bed and a couch. While these items may be on your priority list, they should also be on your affordability list. Have a total payment and time period budget set aside first.
For example, you've decided you want your initial furniture purchases paid off within one year. You've set a budget of $2,400 or $200 per month. You could have a $600 couch that must be paid off in six months at $100 per month. Your dining set is also $600 and must be paid off in six months. Your bed is $1200 and would require six months of $200 payments. You have a choice of buying your bed first or your dining room set and couch to stay on budget.
If you already have a bed or other piece of furniture that doesn't fit in the décor of your new home, keep it until you've saved up the full amount to buy the new one outright.
Read Terms of Your Payment
No-interest offers for six months, 12 months or three years are not necessarily a delayed interest situation. Read all the terms. Your credit card could offer 12 months of no interest followed by paying interest on the remaining balance. Always pay any minimum payments required.
The Bottom Line
Buying items you want on delayed interest can be a great opportunity, or an opportunity you wish you avoided. With any purchase, evaluate whether you need the item immediately. Wait if you can, otherwise, budget carefully to pay your balance off quickly. (For further reading, check out Layaway Plans: Get The Goods Without Going Into Debt.)