Deferred payment plans could cost more than you think

Everyone has a bad day every now and then, and some have more than others. When a washing machine, clothes drier, dishwasher, or other household item throws in the towel and performs its last load, some owners may not have the cash resources to replace it. That’s when purchasing a new item on a deferred interest credit loan can be advantageous. While this type of credit transaction can be useful, it’s not without a few pitfalls.

Before shopping for items with the intention of using a deferred interest loan to purchase it, plan a budget. Just because the item will be purchased using credit instead of cash in a checking account, it doesn’t mean the sky is the limit when looking at the price tag. Look for quality items that will provide years of service, not years of expensive payments.

If your household income decreased because of layoff, job relocation, or reduced hours at work, could you still afford the deferred interest payment? The lower the payment is to begin with, the more likely it will be manageable during leaner times. Keeping up with the payment will allow you fulfill the terms of the deferred agreement and keep your credit rating from taking a noticeable dive. It will also keep the price of the item at the level you expect.

When a person doesn’t follow the terms of a deferred interest agreement, every dime of interest the account would have accrued during the period of the loan will be tacked onto the balance. The interest rate isn’t likely to be in the borrower’s favor if this occurs.

Interest rates on deferred interest loans are usually high. It’s not unusual to see interest rates balloon to 29.99 percent on such a purchase. When a person is late making a payment or misses a payment on a deferred interest loan, this maximum rate is likely to take effect from the date of purchase. If that happens, an item purchased at a good price suddenly transforms into a bad deal that could cost up to five times the original ticket price of the item or more if it takes a person years to pay off the balance. Be sure to read the fine print in any deferred interest agreement to learn about the best and worst case scenarios.

Could a deferred interest loan be used for leisure purchases as well as necessities? It could, but again, be sure to plan your budget for such a purchase before heading to the store to pick up the item. Find a price range that is reasonable for your financial situation and don’t lie to yourself about best case scenarios regarding that future situation.

“If A, B, and C happens, then I can definitely afford the more expensive model,” is a mindset that some eager purchasers develop as an excuse to buy a more expensive version of what they seek. What happens if one or all of the elements that caused the individual to make that determination don’t come to fruition? Then that person will be stuck with an unaffordable loan that will ruin credit, cause a collection agency to aggressively demand payment, and could lead to garnished wages if the company obtains a judgement for the loan balance plus legal and other fees. Never assume the most optimistic income scenario when planning how much debt is affordable.

Companies that offer deferred interest loans do so to move product on store shelves, but they also know a portion of purchasers won’t follow the terms of the loan. They’re counting on such individuals to provide them with an even greater profit. They’re counting on you to increase the return on their investment. Don’t turn your income into a regular stream of long-term revenue for these companies. Pay off the balance of the loan according to the terms of the agreement and be done with it. It will prevent a good deal from quickly transforming into an unending nightmare.