Deferred Interest
Candlefocus EditorDeferred interest is a type of loan which postpones interest payments until a predetermined time period has passed. Basically, the borrower pays no interest in the period of time before the expiration date defined in the loan agreement. However, once this timeframe is reached, any unpaid interest will be added as an additional fee to the entire loan balance, which can cause significant financial burden.
The most common example of a deferred interest loan is credit cards. Many credit cards offer deferred interest periods, which can be especially appealing to borrowers who want to make large purchases but do not want to be burdened by relatively high-interest rates. Deferred interest credit cards can be ideal in such cases, since the borrower can enjoy a payment deferral while taking advantage of promotional offers and rewards.
Deferred interest can also be found in mortgages, as an example of a type of negative amortization. Negative amortization is when the interest on the loan is greater than the payments made, thus the principal balance increases over time. In this case, deferred interest can help borrowers keep their monthly payments at an affordable rate.
However, it is important to note that deferred interest loans are not always a good choice. For starters, in certain cases, borrowers may not be able to pay the entire loan balance before the predetermined expiration date, in which case the interest backlogged might be backdated and accrue compound interest. This can result in a much higher total loan cost. In addition, deferred interest loans often come with relatively high-interest rates and are not ideal as a long-term financing option.
In conclusion, deferred interest loans can be appealing to some borrowers who want to make big purchases, but they can be quite risky when it comes to long-term repayment plans. While they might be beneficial in some cases, borrowers should keep in mind the potential dangers of high-interest rates and backdated payments before deciding if a deferred interest loan is the right choice for them.