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What is a Deferred Payment?

Definition: Deferred payment is an agreement between the lender and borrower allowing the borrower to take possession of goods immediately and start making payments in the future.

What Does Deferred Payment Mean?

What is the definition of deferred payment? The “buy now, pay later” transactions are typical examples of payment deferral. From the seller's perspective, a deferred payment is an accrued revenue, i.e. money not received for goods or services that are already delivered to the customer.

For example, a 0% credit card is deferred revenue for the bank that collects the monthly payment without an additional fee interest rate. From the buyer's perspective, deferred payments are accrued expenses, i.e. money that the buyer has not paid for the goods he has received. For example, the interests paid on a bank loan are accrued expenses because the customer gets the loan before paying the interests on the loan.

Let’s look at an example.

Example

Andy wants to buy a new house. His banker tells him that he can get the mortgage to buy the house and arrange payments for as low as $675 per month to repay the total amount of $100,000 in 15 years at a 6% interest rate. Moreover, the bank allows Andy to make the first payment on his loan after he purchases the house. Andy gets the loan and makes a single payment of $100,000 to buy the house, thereby deferring the payment of the interest payments on the loan.

One factor that Andy should consider for the future interest payments, especially if he has an ARM (adjustable rate) mortgage, is inflation. A rise in the inflation rate over the term of the mortgage will mean that the monthly installment will increase as well because the seller of the house needs compensation for the loss of the value as a result of the higher prices. Therefore, a 3%-5% rise in the inflation rate would increase the payment deferral for Andy's house to approximately $112,000.

Summary Definition

Define Deferred Payments: Deferred payment means a situation in which the delivery of the goods precedes the payment for the goods.

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