Deferred Interest, Waived Interest -- Why You Need to Know the Terms of Your 0% APR Offer

Not understanding how your 0%APR offer works could end up costing you money. Learn what makes deferred interest and waived interest offers different so you know what to expect.

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If you’ve done any shopping lately or even just turned on a TV and watched a few commercials, you’ve probably seen your fair share of zero-interest offers. Smartphones, furniture, appliances, and home remodel projects are just a few of the many purchases you can make while paying no interest for an introductory timeframe.

Although the concept of zero interest seems simple enough, it’s more complicated than you might think, and there are two very different types of zero-interest offers. Before you decide to sign on the dotted line, you need to know whether you’re getting deferred interest or waived interest, as that can make a huge difference in what you end up paying.

Deferred interest vs. waived interest

Both types of offers give you the 0% APR for a limited period of time, such as six, 12, or 18 months. The difference is what happens if you don’t pay off your full promotional balance within the intro period.

Deferred interest

With deferred interest, the creditor is technically only deferring your interest payments each month until the intro period ends. If you pay off the entire balance within the intro period, then you won’t need to pay any interest. But if you have any of the promotional balance remaining after the intro period, then you’ll be charged interest on the balances you had every month going back to the date of the purchase.

Here’s an example of how this works:

  1. You buy a $1,000 TV on a 12-month, 0% APR, deferred interest plan.
  2. You make minimum payments of $40 every month.
  3. After 12 months, you’ve paid $480 and have a remaining balance of $520.
  4. Because you didn’t pay off the balance in time, the creditor charges you all the interest it deferred. This includes the interest you would have paid for month one on a balance of $1,000, month two on a balance of $960, and so on.

Had you paid $100 per month instead, you’d have your balance repaid after 10 months, which would mean you’d truly pay zero interest.

Waived interest

Waived interest means that the creditor only starts charging you interest on any remaining balance you have after the intro period ends, making it much safer than deferred interest.

Let’s say you make the same purchase as in the example above -- a $1,000 TV on a 12-month, 0% APR plan, except this time it’s a waived interest plan. You pay the same $40 per month and have a remaining balance of $520 after the intro period. You’ll start paying interest on the $520 remaining balance, but not on the balance you had before, which means you’ll save quite a bit of money.

Why get deferred interest?

When comparing the two types of zero-interest offers, it’s obvious that waived interest is better. Knowing that, is there any reason to get a deferred interest offer?

The main factor here is availability. Deferred interest offers are extremely common. Many retailers have them, and they’re also a common feature you’ll find on store credit cards, which you can usually get approved for even if your credit score isn’t the best.

Waived interest offers aren’t as easy to get. You’ll find this type of offer with all the best 0% APR credit cards, but you’ll need at least a good credit score to qualify for most of them.

Keep in mind that if you pay off your full promotional balance before the intro period ends, then there’s effectively no difference between deferred and waived interest, because you’re not paying any interest either way.

Be careful what else you charge

If you’re paying down a deferred interest balance on a store credit card, you need to be careful about using the card for any additional purchases. Here’s why:

By law, your card issuer must put any payment amount in excess of your minimum credit card payment towards the balances with the highest APR. Since the deferred interest balance has a 0% APR, that means any purchases you make at your card’s standard interest rate will get paid off first.

There is an exception where deferred interest balances take precedence, but it only kicks in for the final two billing cycles of the intro period.

So, if you continue charging purchases to your store card, your payments will go towards those purchases first instead of your promotional balance. That makes it harder to get your promotional balance paid off, which could lead to you getting hit with deferred interest charges later.

Taking advantage of a zero-interest offer

A zero-interest offer can save you a lot of money if you use it properly. Here’s how you can make sure you come out ahead:

  • Know all the terms of the offer first.
  • Figure out exactly how much you need to pay each month to repay the full balance in time -- this will almost always be more than the minimum payment amount.
  • Don’t miss any payments, as it could cost you in penalty fees and even cause you to lose your introductory 0% APR.
  • Focus on repaying your promotional balance before you charge anything else to the account, especially if it’s a deferred interest account.