The Truth Behind Deferred Interest
Is your practice offering 0% APR loans based on deferred interest? While the initial 0% looks great, the interest owed can snowball if the patient fails to meet the loan conditions. Here’s a detailed look at what deferred interest actually is, and how it’s different from a true APR loan.
Deferred interest, also known as “deferred financing” or “deferred payment interest,” refers to a financial arrangement in which interest on a loan or credit account is temporarily postponed or deferred. During the deferred interest period, the borrower is not required to make regular interest payments or principal payments. However, the interest continues to accrue on the outstanding balance.
This type of arrangement is often seen in promotional financing offers, such as those provided by retailers, credit card companies, or auto dealerships. These offers might include phrases like “0% interest for 12 months” or “no interest if paid in full within 18 months.” In these cases, customers are enticed by the prospect of not having to pay interest for a specific period of time.
It’s important to understand the terms and conditions of deferred interest offers, as they often come with specific stipulations:
- Promotional Period: The period during which no interest or lower interest rates are applied. This period is often limited, and if the balance is not paid off in full by the end of this period, deferred interest charges can apply.
- Payment Allocation: Payments made during the promotional period are typically applied to the principal balance first. This means that if the balance is not paid off in full by the end of the promotional period, the deferred interest can be added to the remaining balance.
- Expiration of Promotion: If the entire balance is not paid off by the end of the promotional period, the deferred interest that has been accumulating is added to the remaining balance. This can result in a significantly higher outstanding amount and retroactive interest charges.
- Payment Behavior: Some offers may include conditions that if you miss a payment or don’t pay off the full balance by the end of the promotional period, the deferred interest can be applied immediately.
- Credit Card Offers: Deferred interest is often associated with credit card offers. If you don’t pay off the entire balance of a purchase made under a deferred interest offer by the end of the promotional period, you could be charged interest on the full original purchase amount.
- Fine Print: Always read the terms and conditions carefully. Deferred interest offers can be tricky, and it’s essential to understand the potential implications.
Although deferred interest can be an appealing way to finance purchases without immediate interest payments, it requires careful planning and adherence to the terms to avoid potentially high interest charges later on. It’s crucial to understand the terms and conditions, make payments on time, and ideally, pay off the full balance before the promotional period ends to avoid any surprise interest charges.
In contrast, a true 0% interest promotion means that if the borrower does not pay off the entire balance by the end of the promotional period, then interest will be calculated based on the remaining balance unpaid after the promotional period is over.
Below is an illustrative comparison of a $4,000 loan, where one offers true 0% interest and the other offers deferred 0% interest.
|True 0% Interest Promotion||Deferred 0% Interest Promotion|
|Promotional Offer||0% interest for the first 12 months, then 25% interest after 12 months||25% interest with 0% interest if paid in full in 12 months|
|Amount paid off (assuming you pay $250 / month during the promotional period)||$3,000||$3,000|
|Remaining principal balance after the promotional period ends||$1,000||$1,000|
|Interest rate during the promotional period||0%||25%|
|Accrued interest during the first 12 months||$0||$650|
|Amount owed at the end of the promotional period||$1,000||$1,650|
Under the true 0% interest promotion, the amount owed is simply the remaining principal balance at the end of the promotional period. Conversely, the amount owed under the deferred interest promotion is much higher because of the interest accrued from the start of the loan period.
If your current patient financing provider offers deferred interest promotion, it may be worthwhile to look at alternatives such as Cherry that offer true 0% interest promotions. Your patients will thank you for that, and better loan terms increase the likelihood of patients accepting the loan to afford their treatments with you.