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How Zero Percent Offers Can End Up Costing You Much More

Image: Shoppers buy electronic items during Black Friday sales

Shoppers buy electronic items during Black Friday sales at a Best Buy in San Diego, California, on Nov. 24, 2016. SANDY HUFFAKER / AFP - Getty Images

Retailers are pulling out all the stops to get your business this holiday season — including offering deferred interest financing deals. But consumer advocates say such programs are credit traps that can end up costing hundreds of dollars for unsuspecting customers.

Big-name companies, including Wal-Mart, Sears, JCPenney, ToysRUs, Best Buy, Apple and Amazon have already rolled out special deferred interest financing offers — an appealing choice for people who want to buy expensive home electronics, appliances or other big-ticket items.

However, while these programs are great for retailers, that's not necessarily the case for the consumer, said John Talbott, associate director of the Center for Education and Research in Retailing at Indiana University.

"The rules are a bit tricky and a bit obscure," he told NBC News. "They get you to buy something you might not have purchased otherwise; something that frankly may be too expensive without that financing mechanism."

Consumer advocates at the National Consumer Law Center (NCLC) call deferred interest programs a "credit trap" that can wind up costing customers big bucks at the end of the loan if they're not careful. They would like to see these loans abolished.

"It's not no-interest; it's deferred interest - and a lot of people don't understand that," said NCLC staff attorney Chi Chi Wu. "There's basically a big time bomb at the end of the promotional period if you slip up. If there's a dollar on that balance after the time period expires, you're going to get hit with this big interest bill, possibly hundreds of dollars."

Miss a payment, make a late payment or have an unpaid balance — no matter how small — at the end of the promotional period, and you'll get hit with retroactive finance charges back to the original purchase date for the entire purchase price — even what's been paid off. It's as if the zero percent interest rate promotion never existed. And that deferred interest rate is usually sky high.

Miss a payment and you'll get hit with sky-high retroactive finance charges back to the original purchase date for the entire purchase price.

Deferred interest plans have an average interest rate of 24 percent, but can go as high as 29.99 percent, according to the NCLC. By comparison, the average interest rate on a basic general purpose credit card is currently 15 percent, according to Bankrate.com.

Retailers insist their deferred interest programs provide a real benefit to most of their customers by saving them money and giving them more spending power.

"The overwhelming number of consumers who use these programs complete them on time, and an even larger percentage are very happy with the programs they chose," said Mallory Duncan, senior vice president and general counsel at the National Retail Federation.

"Any time you reduce the price of a product, and by eliminating finance charges you're effectively reducing the price, you make it more affordable to more people and that's one reason why these programs are so popular," said Duncan.

Say goodbye to Black Friday, and hello to 'Black November' sales 2:56

Earlier this year, the Consumer Financial Protection Bureau told Congress it had "significant concerns" about this form of financing. A CFPB study of the credit market released last year found that less than half the consumers with subprime credit who chose a deferred interest plan paid it off in time to avoid the retroactive interest. The report notes that: "Those consumers are not getting the 'no interest' benefit that they may have expected when they accepted the promotion."

Nessa Feddis, senior vice president at the American Bankers Association, said that for most people, deferred interest programs are a good deal. She pointed to that same CFPB study that shows more than 80 percent of the people who use these programs pay off the balance in full and get an interest-free loan.

"Most customers using the interest-free option use it to make big-ticket purchases they need when they don't have the cash," Feddis told NBC News. "These include unexpected purchases, such as a refrigerator replacement, or a laptop for a child going off to college. The ability to spread payments out over time without paying interest can work better for people's budgets."

Know What You're Signing Up For

In a recent report on deferred interest programs, the personal finance website WalletHub called these financing programs "a wolf in sheep's clothing" because they pair an enticing offer — no interest if paid in full — with a clause that "allows the deal to turn ugly if you make the slightest mistake."

WalletHub's Jill Gonzalez told NBC News most people who opt to use deferred interest programs don't understand how they work.

"That's because the big sign says 'special financing' and they don't realize that this is really deferred interest," she said. They don't understand that it's not the same as a zero percent interest rate deal that many credit cards offer."

Here's the difference. Let's say you bought a television for $1,000 and you signed up for a deferred interest plan with a 27 percent interest rate deferred for 12 months. If you still owed one dollar when that 12 month deferral period ran out, you'd be charged back interest of 27 percent on the entire purchase price or $138.

Now let's assume you bought that TV with a traditional zero percent interest credit card that gave you 12 months to pay off the balance before the interest rate jumped to 20 percent. And let's say you still had $100 remaining at the end of the grace period. You'd only owe interest on the $100 you hadn't paid, just $2.

Transparency is Key

WalletHub analyzed the deferred interest programs offered by 23 large retailers and how transparent their websites are in providing key information about the terms of these financing plans. In the recently released report, they found that many stores — Apple, Big Lots!, JCPenney, Menards, Kay Jewelers and Tractor Supply Co. — did a good job of explaining their programs. Others did not.

Gonzalez says stores could do better if they wanted to, and she pointed to what Apple did.

"When we started doing this study in 2013, Apple was at the bottom of the list in terms of transparency. Now, they're one of the best," she said. "They changed the location of where they put the explanation that interest will be assessed from the purchase date. It used to be at the very bottom of their agreement and now it's one of the very first things you see."

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Some of the companies covered in the WalletHub study reject its conclusions. The National Retail Federation told NBC News its members do a very good job of explaining their programs.

Things get even more confusing when you make additional purchases with the card the store issued for that original deferred interest deal.

That's because all of your payments — above the minimum — will go toward the other purchases first. Retailers don't have a choice. Federal regulations require them to do this. This can make it difficult or impossible to avoid the retroactive interest. So if you do purchase something with a deferred interest card, don't buy anything else with it.

Image: Customer pushes his shopping cart during the Black Friday sales event on Thanksgiving Day at Target in Chicago
A customer pushes his shopping cart during the Black Friday sales event on Thanksgiving Day at Target in Chicago, Illinois, on Nov. 24, 2016. KAMIL KRZACZYNSKI / Reuters

The Bottom Line

Jeff Probst, a finance lecturer at San Diego State University, reminds shoppers that when it comes to financing offers, there are no free lunches and strings are nearly always attached.

"Consumers with detailed knowledge of their financial affairs can find these arrangements very beneficial, a free no interest loan," he said. "On the other hand, those who may not have a good grasp of their finances or currently cannot afford the product could experience a large unexpected interest charge."

In all the excitement of the holidays, it's easy to overextend yourself and then find that you're saddled with big finance charges months later.

"There's nothing worse than having your holiday purchases consume your summer vacation budget due to a deferred interest charge," Probst said.

Note: If you already made purchase using a deferred interest program, keep track of your payments and payment dates. You don't want to pay late and you don't want to have any balance remaining at the end of the promotional period. Keep in mind: Simply making the minimum payment each month will not pay off the balance in full in time.

Herb Weisbaum is The ConsumerMan. Follow him on Facebook and Twitter or visit The ConsumerMan website.