Deferred Interest Loans - Don't Get Pinched!

Welcome back to another episode of the Ask Ralph podcast, where we dive deep into the world of taxes and financial matters. I'm your host, Ralph Estep, Jr., and today we have an important topic to discuss. And that is deferred interest loans. I felt like this is a good time of year to talk about this because a lot of the big box department stores and other places are offering these.

And these loans can be both a blessing and a curse offering potential advantages, but also carrying significant risks. Today we're going to explore the pros and cons of these deferred interest loans. We're going to share some real life stories from listeners who have been affected by these loans. And finally, we're going to discuss alternative financing strategies.

But before we get started today, I wanted to remind all of our listeners to leave a review on our podcast page. That's at www. AskRalphPodcast. com. Your feedback is greatly appreciated and helps us improve our content of the show. Now let's dive into the topic. Deferred interest loans. [00:01:00] Welcome to the Ask Ralph Podcast, where listening to an experienced financial professional can help you make sense of confusing questions, current headlines, and industry trends about taxes, small business, financial decision making, investment strategies, and even the art of proper budgeting.

As Ralph makes the complex simple by sharing his real world knowledge with all things financial. Now here's your host, Ralph Estep, Jr. Preferred interest loans have become increasingly popular in recent years, especially in the retail sector. These loans offer consumers the opportunity to make purchases with no interest for a specified period of time.

Usually that's about 6 to 2, 6 months to 2 years. On the surface, this may seem like a fantastic deal. This is one of the things you can't pass up. Allowing individuals to spread out their payments without incurring any interest charges. Sounds good. However, there are some important things to consider before jumping into a deferred interest loan.

Let's talk about those today. [00:02:00] One of the main advantages of deferred interest loans is the flexibility they provide. They allow consumers to make essential purchases such as home appliances, furniture, without having to pay the full amount up front. It's great. You go into a furniture store, you find a dining room set or a bedroom set you like, and you look at the price and you go, Wow, that's 4, 000 or whatever.

Pick a number. And you say great news is, salesperson says, great news is you don't have to pay for that all today. This can be particularly helpful for individuals who are facing immediate financial constraints. But still need to make necessary purchases. You could use this, let's say your HVAC system died, or you have a major plumbing repair.

A lot of these big plumbing and HVAC companies, I'm just picking on those offer these deferred interest programs. Additionally, deferred interest loans can be a useful tool for building credit. They're going to show up on your credit report. By making regular payments during the interest free period, borrowers can demonstrate their ability to manage debt responsibly.

Those are all [00:03:00] good things. We talked about this in a podcast the other day about building your credit. This can have a positive impact on your credit score, making it easier to obtain future loans or credit cards with favorable terms. But of course, with anything, there's always some downsides. It's important to be aware of the potential risks associated with deferred interest loans.

Ralph, You ask, what are those risks? One of the biggest risks is the potential for a drastic increase in interest charges if the loan is not paid off within the specified period. This is the main point of this whole podcast today. If the full balance is not paid by the end of the interest free period, the lender may retroactively, that means back to the beginning, apply interest charges from the date of purchase.

This can result in a significantly higher total amount owed and can catch borrowers off guard. This is a big deal. Let's just say you went out and bought that furniture set we talked about a little while ago. Let's [00:04:00] just say it was 2, 000 and you got one year without interest. You've heard this on the on the news, excuse me, you heard this on the advertising, one year without interest and you've gone through that whole year and then you don't have the full thing paid off.

Guess what folks, they take that interest back to day one as if that loan hadn't been paid at all. To illustrate the potential negative impact of Deferred Interest Loans, let's hear some real life stories from our listeners who have experienced the consequences firsthand. I took out a Deferred Interest Loan to purchase a new laptop.

I thought I had plenty of time to pay it off, but life got in the way, and I wasn't able to make the full payment within the interest free period. Suddenly, I was hit with a huge interest charge that I wasn't prepared for. It took me months to pay off the balance. And I ended up paying much more than I initially anticipated.

Let's hear from another listener who shared this with us. I used a deferred interest loan to buy a new living room set. I made sure to make regular payments, but I didn't realize that the interest would be retroactively applied if I [00:05:00] didn't pay off the entire balance in time. When the interest charges kicked in, it was a shock.

I had to scramble to come up with the extra money to avoid paying even more in interest. Folks, these stories highlight the importance of understanding the terms and conditions of a deferred interest loan before committing to it. It's really crucial to carefully read the fine print. A lot of times they'll present you with this document.

Nobody reads these. It's in microscopic print on the front and back of something. It's crucial to carefully read this fine print and make a realistic plan to pay off the loan within the interest free period. And you gotta be careful about the automatic payments too. I've seen this be played with as well.

Now make sure you're checking those statements or make sure you're logging in online to see that this account is going to be paid while you're still in the interest free period. In addition to being cautious with deferred interest loans, there are alternative financing strategies individuals can consider.

So if you don't want to go down this Deferred interest loan [00:06:00] approach. Here are some ideas. When I prepared this podcast, I said if people aren't going to use these what are some options? One option is to save and pay cash for whatever purchases you want. That's a no brainer, isn't it, Ralph?

If I had the cash to do it, I would have just paid cash in the first place. So I get it, but I'm just giving you some guidance about an option if you don't want to do the deferred interest by saving in advance. You can avoid the potential pitfalls of debt and interest challenges altogether. What if you can't pay cash?

Another alternative is to explore low interest financing options, such as personal loans or credit cards with promotional interest rates. While these options may still involve interest charges, they typically offer more favorable terms than deferred interest loans. It's truly important to compare the interest rates, repayment terms, and other fees associated with different financing options to make an informed decision.

Now look, I'm not telling you to go run up a credit card for this. But if you look at these deferred [00:07:00] interest loans and look at the interest rates, sometimes these interest rates are in the high 20s to 30%. So this credit card that you think at 18 percent is high is half of what that deferred interest is if you don't pay it.

And you need to be reasonable with yourself. And and I talk about this in my book about budgeting. If you can't afford to pay it in 12 payments, let's say it's a 12 month deferred interest loan. If you truly can't afford to pay it in 12 months, then don't use that financing source.

Use a different financing source. And finally seeking financial advice from a qualified professional can provide valuable guidance when making major purchasing decisions. a financial advisor or credit counselor and be careful with credit counselors. I'm not telling you to go down the scam road there, but they can help you make informed decisions based on your personal financial situation.

They can help you explore alternative financing options and develop a plan to avoid excessive debt. Now, before we wrap up today's [00:08:00] episode, I want to remind all of our listeners to visit our podcast page at www. askralphpodcast. com and leave a review. Your feedback is critical to us, helps us to determine what we're going to present in future podcast episodes and future content.

Thank you for joining me today on the Ask Ralph podcast. I hope this episode shed some light on the pros and cons of deferred interest loans and provided some valuable insights into alternative financing strategies. Remember folks to approach these loans with caution, read the terms carefully and consider alternative options whenever possible.

Stay tuned for our next episode where we'll be exploring another exciting topic in the world of taxes and finance. Until then, this is Ralph Estep, Jr. signing off, and as I always say, take care and be financially savvy. Thank you for joining us on the Ask Ralph Podcast. And with a simple click to subscribe, we'll invite you back to our next episode.