Is Deferred Financing a Deal or a Dud?

April 29, 2014

My kitchen stove needed replacing last weekend, so I headed to my favorite home improvement store, Home Depot, to pick out a new smoothtop electric stove. This gave me the opportunity to upgrade from the basic builder’s white model to a stainless steel version, but of course that set me back several hundred dollars. “No worries,” said the sales rep, “you can take advantage of our 6 months deferred financing deal being offered!”

The deal being pushed was no interest if the purchase was paid in full within six months, with a minimum payment required during that time. Of course, there is always the fine print and in this case, interest would be charged to my account from the purchase date if the balance is not paid in full within 6 months or if I make a late payment. Luckily, I had the cash in my emergency fund so I went ahead and resisted the offer of using my Home Depot credit card. But it got me wondering, how many consumers do end up falling into the trap of paying the interest even though they thought they were getting a deal?

According to CreditCards.com, about 1 in 5 consumers who sign up for no interest deals on big ticket items (like my stove) actually end up owing the finance charges because they don’t understand the fine print of the offers, and that can end up being an expensive trap. The “clawback” of the retroactive interest starts to build up on the store card the day of purchase, but is delayed until the end of the promotional period. In my case at Home Depot, the interest would be accruing at a whopping 24%!

However, most buyers don’t even check the rate since their intention is to pay off the purchase and not pay any interest. But avoiding the finance charges is not a sure thing. Fail to pay off the purchase by the deadline or make one late payment and the card issuer will dump months of back interest on your balance.

These deals can also be found at your doctor’s or dentist’s office through CareCredit to finance high cost procedures such as laser eye surgery or dental implants. A regulatory crackdown by the NY state’s attorney general found that neither medical providers’ nor CareCredit’s marketing materials adequately explained that patients would pay 26.99% interest, built up from the date of purchase, unless they paid off the balance by the end of the deferral period. About 25% of CareCredit customers who signed up for the deferred interest promotion ended up paying the high-rate finance charges, the probe found, “too often because of the consumer’s lack of understanding of what to do to avoid paying interest and general misunderstanding of the terms of financing.”

So should you pass on these offers? As long as you are committed to paying off the balance before the promotional period and you make your minimum payments on time, you can benefit. But just make sure you have the money already in the bank and you can handle the payments so you don’t find yourself falling into the trap of the clawback.