As you begin your holiday shopping, beware the retailers that are offering what seems to be a great deal: zero percent financing.
These programs, which are also known as "deferred interest financing," allow buyers to snap up big-ticket items and avoid paying interest for a specified period of time. Retailers make these deals through their store credit cards.
But there's a catch: If you fail to pay the full balance by the end of the interest-free period, you will be on the hook for high interest rates against the original purchase amount — not the remainder.
"These offers aren't worded transparently, and that's what confuses consumers," said Jill Gonzalez, an analyst with WalletHub, a personal finance site.
"They don't bother to look at the fine print when they're in a long line at the cash register, it's Black Friday, and they don't want to hold anything up," she said.
Here's how you can protect yourself.
Don't confuse deferred-interest financing with the introductory zero-percent interest deal you might get on a traditional credit card.
"The biggest and only difference is that deferred interest applies retroactively to the entire purchase," Gonzalez said.
Let's say that you're financing an $800 television with a regular credit card that has a zero-percent interest rate for six months. At the end of the promotional interest-free period, you still owe $20.
In that case, the remaining balance will be subject to your regular annual percentage rate (APR).
If you used a "deferred interest" store credit card to buy the same television, you will still enjoy that zero-percent interest rate for six months. Let's also say that you owe $20 at the end of the promotion.
This time, you will owe the remaining balance, plus back interest on the original $800 purchase. Depending on the retailer, the APR that kicks in afterward can exceed 25 percent.
Naughty or nice
Earlier this month, WalletHub rated major retailers on their use of deferred interest financing programs. See below for details.
You're likely to find these financing programs at furniture stores, particularly because those purchases tend to come with large price tags, Gonzalez said.
Be on your guard
When you're at a brick-and-mortar store, be vigilant for terms like "special financing" at the register. That's often a tip-off to a deferred interest program, said Gonzalez.
Online retailers aren't immune from these deals, either. If you use PayPal at checkout, you'll see a "Bill Me Later" option wherein you can finance your purchase with no interest — provided you pay the balance in full within six months.
With any of these programs, be sure to find out when the interest will be assessed. Will it apply from the date of purchase, or does it apply at the end of the promotional period?
Also, know the APR you will be paying once the zero-interest period is up. "If you apply for one of these cards in the store, you might not know it then, but you'll find out later," Gonzalez said.
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