Amy has a master's degree in secondary education and has taught math at a public charter high school.
After reading this lesson, you will see why a deferred payment is not a loan. You will also see how it can help you to purchase items that you normally would not be able to pay for up front.
Say you go to your local department store and you want to purchase a big screen television. You can't afford to pay the whole purchase price right now, but you can pay a little bit each month until it's paid off. Fortunately, the department store offers a deferred payment plan option.
Put simply, a deferred payment is an agreement to pay for something at a later date. The store allows you to pay for the TV in four monthly installments, so you don't have to pay for all of it up front. If the television costs $2,000, you'll pay just $500 up front and another $500 each month for three months until you've paid off the whole thing.
Deferred payments are fairly simple. The most important part is your promise to pay back the whole amount in the future. Because deferred payments rely on your promise to pay, this option is not available to everybody. If you have bad credit, for example, you will most likely not have this option available to you. Financially speaking, those with good credit are usually given this option.
Some deferred payment plans allow you to make the first payment after your purchase, such as a month afterwards. Others require the first partial payment up front. It all depends on the terms of the deferred payment plan.
Not a Loan
There is a difference between deferred payments and loans. A deferred payment plan is not a loan. Loans have interest that you also need to pay in addition to the purchase price of the item. In our television example, a loan for the item would mean you pay an extra 2% (or some such amount) of the price remaining each month. So if you owed $1500, you'd owe an extra $30 in interest.
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A deferred payment plan means that when you add up your partial payments, it will equal the purchase price of your item.
Today, many companies are offering deferred payment options. You'll have to meet the eligibility criteria for the company before being accepted for this payment option of course. Companies that have this option may refer to it by another name. The Home Shopping Network, for example, refers to their deferred payment option as Flex Pay.
Some colleges and universities also offer a deferred payment plan. The University of California, Riverside, for example, has such as a plan where you pay your tuition in installments. This university refers to its deferred payment plan by its technical name: Deferred Payment Plan.
Let's review. A deferred payment is an agreement to pay for something at a later date. The most important aspect of a deferred payment plan is the promise you make to pay the whole amount back in the future. This is usually done in several installments. A deferred payment is not a loan and does not charge interest. But, just like when you apply for loans, there are certain eligibility criteria you need to meet, often having to do with good credit. Many companies and universities offer this kind of payment plan.
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