A widely utilized payment plan, frequently offered by major retailers in the United States, boasts zero interest on purchases if paid off within a specified period, such as six months. However, the seemingly enticing offer comes with a catch, leading consumer advocates to caution individuals about the potential pitfalls lurking in the fine print.
Known as “deferred interest” plans, these arrangements can have adverse consequences for customers who fail to settle the entire balance by the end of the promotional period. Consumer advocates argue that these plans, often presented as a great deal, can turn into a financial trap for those who overlook the specific terms.
In the realm of deferred interest, if any amount of debt remains unpaid at the conclusion of the promotional period, the entire deal unravels. Suddenly, the consumer becomes liable for the full sum of deferred interest, frequently at a steep annual rate exceeding 30%. This effectively nullifies the zero-interest promotion, leaving the individual burdened with unexpected financial obligations.
Odysseas Papadimitriou, founder of WalletHub, categorizes deferred interest as a “trap” and highlights that major retailers and brands are complicit in promoting such practices. According to a Deferred Interest Study conducted by WalletHub, a significant 62% of Americans believe that deferred interest should be deemed illegal, as reported last month based on a representative survey of approximately 250 Americans.
Some of the nation’s largest and most reputable retailers, including Amazon, The Home Depot, and Best Buy, offer deferred interest plans, according to the study. Conversely, notable retailers such as Walmart, Target, and Costco do not participate in this payment scheme.
Deferred interest promotions are particularly prevalent during the holiday season, a time when consumers may feel compelled to stretch their budgets beyond available cash. The mechanism typically involves customers making significant purchases using a store credit card, with a grace period of six or twelve months to settle the balance without incurring interest charges. However, interest continues to accrue during this period, and failure to meet the payment deadline results in the accumulation of the entire deferred interest.
The concept of paying interest on debt that has already been cleared is counterintuitive and contrary to consumer expectations, according to Papadimitriou. As an illustration, he describes a scenario where a consumer uses a deferred interest offer to purchase a refrigerator for $1,800, with a no-interest term of 24 months and an annual percentage rate of 25.99%. If the consumer makes monthly payments of $75 over the 24 months, they should be able to clear the balance and avoid interest. However, missing payments could lead to approximately $900 in additional interest charges once the 24-month period concludes.
While deferred interest plans can be a useful tool for savvy borrowers, those with high credit scores, and individuals with stable cash flow, experts caution about the potential risks involved. Ted Rossman, a senior industry analyst at Bankrate, suggests that these plans may be most beneficial for significant purchases that consumers are confident they can repay within a slightly extended timeframe.
According to the Consumer Financial Protection Bureau, consumers spent over $60 billion on deferred interest purchases in 2020, with a significant portion allocated to home improvement. The American Bankers Association defends deferred interest programs, contending that they offer benefits to consumers facing unexpected purchases, such as car repairs or home appliance replacements. These programs provide individuals with the option to pay over time, potentially avoiding interest charges and steering clear of more expensive forms of credit.
In conclusion, while deferred interest plans may seem appealing on the surface, consumers are urged to exercise caution and carefully scrutinize the terms and conditions. The popularity of such plans, coupled with their potential financial pitfalls, underscores the need for heightened awareness and informed decision-making among consumers navigating the complex landscape of retail financing options.