As discussed above, deferred interest plans are typically marketed as “interest free” products but many consumers fail to receive that benefit and are instead charged interest retroactively.  Accordingly, as with the prohibitions on other repricing practices discussed above, prohibiting the assessment of deferred interest will improve transparency and enable consumers to make more informed decisions regarding the cost of using credit.  Accordingly, the Agencies conclude that an exception to the general prohibition on rate increases is not warranted for the assessment of deferred interest.

The new rules still allow the lenders to charge interest first and credit back the interest if the consumer pays off the principal balance within the promotion period. This effectively preserves the benefit of “same as cash” to the consumers without the deception of deferred interest. It’ll be interesting to see if the stores and their financing providers will continue the “same as cash” offers using this credit-back method.

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If you pay off the balance within 12 months, all three work pretty much the same. You basically have an interest-free loan for 12 months. Things start getting interesting (pun intended) when the 12 months end.

The 0% APR deal is usually used by credit card companies for balance transfers or purchases on a new credit card. During the promotion period, you are required to pay minimum payments, say 2% of your outstanding balance. After the promotion ends, if you still owe a balance, you start paying interest on that balance at the regular credit card rate.

The “same as cash” deal is usually offered by a retail store. You have to sign up for their store credit card. You also make minimum payments during the promotion period, same as in the “0% APR” deal. If you don’t pay off the balance in full by the end of the promotion period, you pay retroactive interest from the very beginning, at a rate often 20% or higher. It’s called a deferred interest financing program. If you pay one dollar less or one day late, you still activate the retroactive interests. Basically you have this time bomb ticking. If you defuse it before the clock strikes twelve, you escape unscathed. If you miss it, it explodes in your face.

The “no interest, no payments” deal is also a deferred interest program. The only difference is you don’t have to make minimum payments during the promotion period. It’s even more onerous than “same as cash.” Because you don’t make payments, your payoff balance is higher and you owe more retroactive interest if you can’t pay it off.

A reader recently e-mailed and asked me what to do when the lender for his “24 months same as cash” deal offered to give him a $50 credit if he pays it off early. It’s a sign of change in times. Instead of waiting until the end and catching the victims who fall into the trap, the trapper is willing to let the pray go with a parting gift. I made a calculator to show the interest he can earn from money in a savings account for the remaining term is worth about $50. Because the interest is taxable while the credit from the lender is not, he’s better off taking the credit. More importantly, paying it off now gets him safely out of the trap. If he accidentally triggered the trap, there’s more than $600 of deferred interests waiting for him. If anyone else faces the same choice, the calculator is here:

Deferred Interest Financing Calculator

Retail stores love to push these “same as cash” or “no interest no payments” programs because they help the store sell more expensive products. Add a Kindle to your cart in Amazon and you will see an offer like this. The store also receives a kickback from the lender. The federal regulators recently announced some new regulations on unfair or deceptive acts or practices which banned two-cycle billing and universal default by credit card companies. I’m disappointed happy to see that they did nothing to disallowed deferred interest programs like “same as cash” or “no interest, no payments.” The deferred interest programs are evil. They make credit cards look like nice guys. Two-cycle billing is going back one statement cycle. Deferred interest programs go all the way back to the very beginning. If two-cycle billing is unfair or deceptive and must be banned, why should deferred interest be legal?

[Update on Jan. 14, 2009] Upon closer reading of the final rules, I see the deferred interest payment plans like “same as cash” or “no interest, no payments” are actually not going to be permitted after July 1, 2010. See follow-up post Deferred Interest Payment Plans Banned.

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