“Zero interest! No Money Down!” Just pay twice as much later…

Low interest offers may cost more than you think

Now that the holiday shopping season is in full motion, many retailers are offering great deals to get consumers through the door. A recent post on The Consumerist warns against one type of deal that may just trap you later — deferred interest.

You may not have heard that term before, but you have certainly seen the advertisements for “zero interest for six months.” There are two ways stores may pull that off. The first is to offer an introductory rate, after which interest starts to accrue. This means that you only pay the higher interest rate after the advertised time period is over.

The second is “deferred interest,” in which the interest accrues from the moment of purchase. If you pay off the full amount during the advertised time period, you don’t pay any of that interest. However, if have anything left to pay once the timer runs out, you pay ALL of the interest that accrued during that time — and the interest rate may be artificially high.

BBB advises consumers to pay close attention to the terms of any financing deal and ask a few questions:

  • Is this an introductory rate or is the interest deferred? An introductory rate can end up saving you money. Even if you plan to pay off the entire purchase within the specified time frame, a deferred interest rate could end up hurting you.
  • What is the interest rate if I don’t pay the balance off in time? While a low introductory rate may be enticing, find out how much you will pay once the timer runs out. Do the math and see if you would be better off going somewhere with no introductory rate, but a better overall rate.
  • What happens if I miss a payment? Things come up for even the most responsible debtor. Your great interest rate may suddenly disappear. You may owe interest for the deferral period in addition to the higher rate, and you may have to pay a fee for a late or missed payment. Some stores may even repossess your purchases.
  • What is the total purchase price? Some companies may offer you zero percent interest, but tack on high fees and charges for the privilege of financing your purchase. Others may just charge you a low weekly or monthly payment that, in the end, totals much more than the item was worth.
  • Am I better off paying with a credit card? If you’re going to end up paying high interest rates on your purchase, or if you can pay it off within 30 days, consider using a credit card. The interest rate may be lower than the store’s financing and you will have additional protections should there be a problem with your purchase.