What is deferred interest?

If you take on credit with deferred interest, the interest payments you have to make are postponed for a certain amount of time. But what types of loans or lines of credit can have deferred interest? How is it calculated for each? And can you avoid paying deferred interest entirely?

Read on to learn the answers to these questions and more.

Key takeaways

• Borrowers who have loans or lines of credit with deferred interest won’t have to pay that interest for a predetermined amount of time.
• If you’re able to pay off the full balance within the interest deferment period, you may not have to pay interest at all.
• If you’re unable to pay off your loan’s balance by the end of that period, you’ll owe the interest that has accrued on your loan.

Deferred interest is interest you don’t have to pay for a specific period of time. But depending on the type of loan—and how quickly you pay off the full balance—you may have to pay the interest eventually.

Credit cards and mortgages are two types of loans that are typically associated with deferred interest. But it can also appear in conversations surrounding student loans and personal loans.

With a deferred interest promotion on a credit card, you won’t pay interest on a qualifying purchase or purchases until the end of the deferred interest period. And when the period ends, the credit card’s standard interest rate will apply.

But the standard rate won’t apply to just the remaining balance. As the Consumer Financial Protection Bureau (CFPB) explains, “If you do not pay off the entire balance of the promotional purchase you’ve made on your card, then interest going back to the date of the purchase will be added on top of the remaining balance.”

Because of this, it can be helpful to plan on paying off the full balance before the end of the deferred interest promotional period. Otherwise, you’ll owe all the interest that was deferred during the promo period—as well as the remaining balance.

Mortgages with deferred interest work a bit differently than a deferred interest promotion on a credit card does.

Some mortgages have monthly minimum payment options that do one of the following:

• They don’t include interest for a certain period of time or a certain number of payments.
• They allow you to pay only some of the interest you owe.

If you don’t pay any interest or pay only a portion of the interest, then the unpaid portion is added to the principal balance—what you still owe on the original amount you borrowed. This can result in what’s known as “negative amortization.” As the CFPB explains, “Negative amortization means that even when you pay, the amount you owe will still go up because you are not paying enough to cover the interest.”

“Then you end up paying not only interest on the money you borrowed, but interest on the interest you are being charged for the money you borrowed,” the CFPB warns. “This dramatically increases the amount of debt you have and the cost of the loan.”

So take it from the CFPB: “To keep your debt from growing, try to pay down all of the interest and at least some of the principal you owe.”

Student loan lenders don’t typically offer deferred interest. If you decide to defer paying your student loans—meaning you suspend payments on your loan for a set period of time—you may still be accruing interest during your deferment period.

This also isn’t to be confused with the COVID-19 Student Loan Payment Pause, under which interest rates are set to 0%—no interest accrues until the pause expires. This technically isn’t deferred interest since interest isn’t accruing during the pause. The only interest you’ll have to pay back is whatever had already accrued before this pandemic aid measure was put in place.

Deferred interest personal loans are relatively common—particularly when it comes to big-ticket retail purchases like furniture and appliances.

You may often see examples of this on products that advertise “no interest for x months.” If you’re able to pay off the balance of your personal loan within that set offer period, you may not have to pay any interest. But if you make a late payment or have to continue making payments after the offer period ends, you’ll owe the remainder of the balance and the interest that has accrued since the start date of your loan.

A 0% APR and deferred interest might seem similar, but they’re actually much different. And as the CFPB explains, “The differences can have big effects on your wallet.”

With a 0% APR, you pay no interest on certain transactions—usually purchases, balance transfers or both—during a certain period of time. Then your standard APR applies once the 0% APR period expires.

If you’re carrying a balance when the period expires, you’ll start to see the card’s standard rate applied to the balance. But interest going back to the date of the original transaction won’t be added on top of the remaining balance—unlike with a deferred interest promotion.

Telling the difference between a 0% APR promotion and a deferred interest promotion can be tough. But the CFPB offers a little help: “Deferred interest offers use language like ‘No interest if paid in full within 12 months.’ The ‘if’ means you could end up paying more than you expected.”

But 0% APR promotions, on the other hand, use language like “0% intro APR on purchases for 12 months.”

Deferred interest is calculated just like other interest charges. All that’s different is when—and if—you have to pay the interest.

Remember: “If you do not pay off the entire balance of the promotional purchase you’ve made on your card, then interest going back to the date of the purchase will be added on top of the remaining balance.” That means that if you don’t pay off your balance before the end of the promotional period, you’ll owe all the interest that was deferred—as well as the remaining balance.

When it comes to credit cards, your cardholder agreement will explain how interest is calculated and when it’s charged. Depending on your card’s terms, it may outline your daily calculated interest or monthly calculated interest. And your cardholder agreement will include the specific terms of your deferred interest promotion, too.  

And for a mortgage, information about interest calculations and charges can be found in the documents you signed at closing.

Whether you ultimately have to pay the deferred interest might depend on the type of credit.

If you want to avoid paying deferred interest on a credit card, you have to pay off the entire balance before the deferred interest period ends. Otherwise, you’ll owe the interest that’s been adding up since the date of the original purchase. 

Keep in mind that when it comes to a mortgage, you can’t avoid paying the deferred interest—you’ll have to pay the interest eventually, whether it’s deferred or not.

Deferred interest doesn’t directly affect your credit scores. But that doesn’t mean it can’t have an indirect impact on your credit.

If you don’t pay off your balance during the deferred interest period, for example, then the deferred interest will be added to the balance you owe. That will increase your credit utilization ratio, which could hurt your credit scores.

And keep in mind that you still have to make minimum payments during a deferred interest period. Late payments or missing payments altogether can hurt your credit scores—and result in late payment fees, interest rate increases or other penalties. A late payment could even cause your deferred interest period to end early.

When considering a deferred interest promotion, the CFPB recommends keeping a few things in mind:

• The length of the deferred interest period: Knowing when the deferred interest period ends could help you pay off your credit card balance before the standard rate kicks in.
• The standard interest rate: This is the interest rate at which the deferred interest will accrue. It’s also the interest rate that will apply once the deferred interest period ends.
• The terms and conditions: Be sure to read the fine print. A late payment, for example, could cause your deferred interest period to end early. 
• The minimum credit card payment compared with the balance: As the CFPB notes, “Your minimum payment alone usually won’t pay off your deferred interest purchase before the deferred interest period ends. Calculate how much you’ll have to pay each month to pay off the purchase on time (or early, if possible).”
• Deferred interest can significantly increase the cost of a mortgage: Remember the CFPB’s warning: Deferred interest mortgages can dramatically increase your debt. That’s because you’re paying not only interest on the money you borrowed—you’re paying interest on the interest you’re being charged on the money you borrowed, too.

Remember: Deferred interest means postponing the interest you have to pay for a certain period of time. And if you’re able to pay off the entirety of the balance during the interest deferment period, you may not have to pay interest at all. But if you don’t pay off the entire balance before the end of the deferment period, you’ll owe the interest that has accrued.