Interest-Free Option (IFO) VS Deferred Payment Programs

Updated on April 1st, 2022
Interest-Free Option (IFO) VS Deferred Payment Programs

When most people think of financing, they imagine a standard installment loan arrangement: The loan amount and projected interest are divided over a series of equal monthly payments. 

That arrangement works well and is easily understood by most consumers. But some people might have trouble paying cash upfront or even coming up with a down payment or initial financing payment right away. Especially for impulse, unexpected, or emergency expenses. 

You may be able to help customers over that hump and generate more sales by sweetening the deal on the front end. 

Interest Free Option Vs. Deferred Payment Plan 

For merchants, there are two proven and popular ways to do that: You can offer an initial interest-free option, or you can offer a deferred payment plan. 

There are important differences between the two types of arrangement. It’s important to understand the advantages and disadvantages of each, so you can explain them clearly to your customers. 

Interest Free Option 

With an interest-free option, the customer qualifies for financing, makes the purchase, and the finance company - if any - releases the funds to the merchant upfront. The customer has received a loan, but no interest accrues for a set period of time.  

Other popular terms for an interest-free option include "no interest promotion," or "deferred interest plan."

When you see advertising for ‘90 Days Same as Cash’ deals, this is the type of financing they’re offering. 

Deferred Interest Advantages

An interest-free option may be a good match for customers who are undergoing a temporary cash crunch, but who expect to be able to pay off the balance quickly. They can get that repair done, or put that piece of equipment to work right away. The merchant gets a sale they may not otherwise have gotten. The merchant also gets their money up front from the finance company - minus a small discount - which can be converted immediately to operating capital. 

A credit card company, in effect, offers customers an interest free option. All they have to do is pay off their credit card bill by the end of the next billing cycle. However, for contractors and other merchants who sell big ticket items, credit card financing may not work well, due to low credit limits. Or the customer may want or need a longer interest-free period than the 30-45 days grace period they can get from credit cards. An interest-free option consumer loan can fill that gap in the marketplace.

For the right customer, it’s a win-win solution all around. 

The downside for the consumer happens if they aren’t able to pay off the entire balance within the interest-free period. At that time, the interest rate kicks in and might be quite high - especially for those with negative information on their credit report.

In some cases, missed payments or late payments could trigger high interest rates, as well. 

So it's important for customers to read the fine print before borrowing. To avoid deferred interest charges, customers should try to pay off the entire balance before the promotional period expires. Minimum payments generally won't pay off the principal balance before the promotional period ends. 

How to Extend Interest Free Period Financing To Your Customers

Merchants and contractors who want to extend a deferred interest loan to their customers have two options: Extend the credit and handle collections themselves, or outsource the financing to a third-party lender or consumer finance company. 

Most small merchants don’t like to extend credit themselves, however, for several reasons:

  • It ties up cash that may be needed for operations
  • At zero interest, it doesn’t provide a return
  • It exposes the merchant to significant default risk
  • It takes time and effort to staff an accounts receivable department, handle collections, and pursue defaults.

For most small businesses, the best way to offer an interest free option is to use a third-party consumer finance company that specializes in their industry. That’s where we can help. 

Many lenders (including Time Investment) will work with merchants to design multiple custom financing solutions to suit the needs of individual businesses and their customers. You may be able to create several options to help make your services more affordable to a wider variety of customer types - increasing your sales and growing your business in the process. 


Deferred Payment Plans

With a deferred payment plan, the customer doesn’t have to make payments for a set period of time, but interest continues to accrue unless the customer makes interest payments. 

If you see advertisements that say things like “Buy now - no payments until June!” then you are probably looking at a deferred payment plan. 

Just like interest only loans and other forms of financing, merchants can choose to extend the credit themselves or contract with a third-party consumer finance company to handle the loan. 

Unlike an interest free option loan, however, a deferred payment plan loan generates a return for the lender early in the term. 

Again, most small businesses prefer to use a third-party lender or consumer finance company to offer these loans. That way, they get the money up front, they aren’t tying up capital, they don’t have to run a collections department, and they eliminate default risk — while still getting the sale. 

The finance company profits from the interest that accrues during the payment deferral period. Because of this, the merchant may not need to take a discounted payment from the finance company, as might be the case with a deferred interest loan. This could be a factor for some merchants in narrow-margin businesses. 


For example: 

On a $10,000 interest free option loan, the merchant may receive a payment of $9,920, whereas a deferred payment plan loan of the same amount may fund the full $10,000 to the merchant. 

Why the difference? With an interest free option, the merchant picks up the interest the customer doesn’t have to pay. 

Alternatively, some arrangements may fund the full amount, but the interest free option loan may charge a higher interest rate to the customer after the expiration of the interest free period. This is to compensate the finance company for forgoing interest during the early part of the loan, and for prepayment risk. This is the risk that the customer will pay off the loan within the interest-free period. 

With both interest free option loans and deferred payment plans, the customer can benefit from your services immediately, and you as the merchant still get your money right away, so you aren’t tying up precious cash flow. 


Benefits of Using A Consumer Finance Company

Meanwhile, by partnering with a non-bank consumer finance company that specializes in your industry, you retain control of the sales process. You don’t have to wait for customers to fill out lengthy home equity loan applications. Also, non-bank lenders can typically approve a wider variety of credit types than highly-regulated bank lenders and many credit card companies. 

In each case, offering customers realistic, competitive and affordable ways to pay for your products and services can help increase sales, boost customer loyalty, and help generate long-term growth.

Sara Hafeman

With years of experience in the consumer financing industry, Sara Hafeman currently leads marketing and partner development at Time Investment.