Deferred Billing

What Is Deferred Billing?

Deferred billing is a sales promotion technique offering a grace period before payments must be made, typically for an auto or furniture purchase. Deferred billing offers may also include an interest-free period if full payment is made by a certain date. Deferred billing or a zero-interest loan can encourage impulse buying.

Understanding Deferred Billing

Deferred billing may be used to encourage potential customers to purchase big-ticket items immediately rather than later (or not at all) and is also used with less expensive, non-interest-bearing purchases, such as magazine subscriptions. Consumer goods that are consumed over a long time period, but that typically have a large up-front sticker price, are commonly sold under deferred billing arrangements.

Deferred or no-interest billing typically involves an approved credit agreement, which waives the first several payments. Missing or making a late payment can result in additional costs. No-interest financing means that interest on a balance may be waived for a period or entirely depending on the credit arrangement. Car dealerships may offer “zero-interest” financing with or without a grace period for payments.

For expensive items, buyers fill out a credit application, and there can be penalties and increased interest rates for late payments. For example, if there is a six-month no-interest period, the interest still accrues but is “forgiven” if the entire loan is paid off within the six-month period. If a payment is late, the forgiven interest will be added back onto the balance and will continue to accrue until the loan is paid off.

Deferred billing can affect a company's income statement and balance sheet, due to the period when revenue is recognized. Companies may also re-sell loans made with deferred billing or interest-free features.

Deferred Billing and Consumer Preferences

Deferred billing can be especially profitable as a marketing strategy to consumers who exhibit high time preference, time-inconsistent preferences, or hyperbolic discounting. These are consumers who place a much higher value on the satisfaction of immediate wants and needs, rather than on future wants and needs, even to the point that they may make frequent impulse purchases that they later regret. Because high time preference is often associated with lower wealth and income consumers, they may sometimes be characterized as a form of predatory finance.

This might be especially true in the case of hyperbolic discounting, a concept developed in behavioral economics. These individuals will so steeply discount the value of loan payments over the near-to-medium term that they place disproportionately little value on later loan payments. Deferred billing arrangements, by delaying the first payment by six or 12 months, take maximum advantage of the preferences of these consumers for immediate benefits and aversion to near term costs. However, due to the nature of hyperbolic discounting, these consumers often later come to regret the purchase as the payments come due and are no longer discounted as far-off future expenses.

Deferred billing may also encourage a customer to make a purchase because they believe they are being rewarded for having good credit or will be better able to afford the purchase in the future. Offering a no-interest period can even appeal to a customer’s perception that they are saving money.