Some major retailers in America offer a popular payment plan that promises no interest on purchases if you pay them off within six months, which sounds great at least until you read the fine print.
What is Deferred Interest?
Consumer advocacy groups say that bad things happen to the customer who cannot pay the full balance before the promotional period ends. If any debt remains until the end of the promotional period, the deal is over. Suddenly, the consumer owes every penny of the deferred interest, often at a high annual rate of up to 30% or more. It’s as if the no-interest offer never existed.
62% of Americans say Deferred Interest Should Be Illegal
The majority of Americans, 62%, believe that deferred interest should be illegal, according to a report by WalletHub last month. This conclusion comes from a survey conducted on about 250 Americans.
Deferred Interest Becomes Complicated
Many of the largest and most trusted retailers in the country offer deferred interest, according to a WalletHub study, including Amazon, The Home Depot, and Best Buy. There are several other stores that do not offer this service, including Walmart, Target, and Costco.
Deferred Interest Is a Trap
Deferred interest peaks during the holiday season, a time when frustrated consumers attempt to stretch their budgets beyond the cash they have available. Shoppers typically put a large purchase on a store credit card. The buyer may have six or 12 months to repay the balance without owing any accompanying interest.
Deferred Interest Accumulates
However, interest accumulates similarly. And if the buyer misses the repayment deadline, everything becomes due. The idea of paying interest on debt you no longer owe is “completely counterintuitive and completely contrary to anything one could expect,” according to Odysseas Papadimitriou, founder of WalletHub, in an interview.
Deferred Interest Can Be Useful for Smart Consumers
Deferred interest is a valuable tool for savvy borrowers, consumers with high credit scores, and those with comfortable cash flow, according to finance experts. “The best way to use one of these plans is probably for a large purchase you are confident you can pay off, but need a little more time,” said Ted Rossman, senior industry analyst at Bankrate.
Deferred Interest Is Complicated
About four-fifths of consumers who use deferred interest say they can pay off the debt by the end of the promotional period, thus avoiding interest, according to the federal agency. For subprime borrowers, with low credit scores, the statistics are not as good. Only about three-fifths manage to avoid the interest “trap.”
Deferred Interest Confuses Many People
Approximately three-fifths of consumers do not understand how deferred interest works, according to a WalletHub survey. Most consumers who understand it view it as unfair. The typical deferred interest plan offered by Best Buy promises to be “interest-free if paid in full within 12 months,” or 18 months, or 24 months, depending on the size of the purchase. After the promotional period ends, the variable interest rate can go up to 31.49%.
Deferred Interest Confuses Many People
Many consumers read the deferred interest offer and assume that interest does not start until the end of the promotional period, according to Chuck Bell, a policy advocate at Consumer Reports. “They do not understand that the interest is retroactive,” he said.
Deferred Interest Should Be Illegal
In a complaint filed by a consumer in Maryland in June 2023 with the Consumer Financial Protection Bureau, the consumer talked about using a credit card from Synchrony Bank to finance a home improvement project. The card was advertised “as an interest-free card,” and the consumer did not realize that interest was only 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 amount due had increased by $5,700 in deferred interest.
Deferred Interest
Deferred interest is considered one of the worst abuses in the credit card industry
The Credit Card Accountability Responsibility and Disclosure Act of 2009 added new protections for consumers against sudden interest rate increases and excessive fees. The law also prohibited card issuers from charging interest on debt that consumers have already paid off.
Consumer advocates push for a ban on deferred interest
However, federal regulators created an exemption for deferred interest, according to Wu of the National Consumer Law Center. The Consumer Federation has asked regulators to ban deferred interest “at least a half dozen times,” she said. “Clearly, we don’t like it.”
Deferred interest is designed to frustrate consumers
She and other critics say that deferred interest is designed to frustrate consumers into meeting the terms of the offer. “Nowadays, you don’t even sign a piece of paper,” Wu said. “You sign on an iPad. You think you’re just getting a no-interest payment plan. With virtual electronic statements, “you don’t even get a bill in the mail.”
Alternatives to deferred interest
If you’re wondering now about alternatives to deferred interest, here are a few:
Get a 0% interest credit card
A 0% interest credit card allows the holder to carry a balance for 15 or 18 months without accruing interest. After the promotional period ends, interest starts to accrue – but only on the debt that remains on the card. Nothing gets deferred.
Use the “buy now, pay later” option
Buy now, pay later works like an installment loan: you typically pay for your purchase over 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 with deferred interest, according to Bill from Consumer Reports.
Buy something cheaper
If you’re struggling to pay your bills, it might be best to “rethink getting that $500 gift,” Wu said.
Source: https://www.aol.com/62-americans-zero-interest-payment-172152880.html
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