What Is Deferred Payment?
The term “deferred payment” can apply to an agreed arrangement between parties across different situations, but generally speaking it means that the buyer or contractor can obtain goods or services now, but pay for it later (“Buy now, Pay later”), without additional interest or fees in some cases.
The most common example is in retail, where goods that require a hefty sum are sometimes offered on a deferred payment basis by the seller as an incentive to new customers, who would otherwise not consider obtaining such goods due to the prohibitive price tag.
So, for example, a furniture store may offer a $1,000 sofa on a deferred payment plan, which means that the buyer can take the sofa now, but would not have to pay anything (or pay only interest) for up to 6 months, or after which time they must make a payment in full or start paying in installments according to a set schedule.
There can be many reasons why the store might offer something like this – if they deal mostly with a clientele for whom an upfront lump sum of $1,000 is difficult to come by, then this would be a way to lure those customers, in a seemingly “win-win” setup.
However, with the ubiquity of credit cards, which are essentially a deferred payment system that you control yourself, the deferred payment or the “lay-away” plan (payment in installments without a grace period) in retail is largely relegated to those sectors of society that still rely mostly on cash transactions.
In the area of services, a contract may specify a deferred payment plan as the method of compensation. This setup is most common in situations where there isn’t any upfront cash to pay contractors, but if/once the project is completed, a plan would be in place to have a cash flow in place.
An independent film project, for example, may secure key crew members this way. The idea is to make the film with little money, then make a huge effort to sell it or otherwise find distribution, and, if successful, pay collaborators in arrears.
More generally, in the area of finance, loans can be issued on a deferred payment basis, which again refers to a “grace period” before payments kick in – student loans, for example, that become payable only after graduation.
Retirement schemes such as an annuity, but also an IRA, 401(k) or even basic social security, can also be considered a form of “deferred payment,” since the payer pays into them now with the expectation of being paid back later, post-retirement.
The difference in this situation, of course, is that the payer and the payee are the same, and they are in fact paying a third-party entity to manage the transactions, whether it’s a bank, a brokerage firm or the government (in the case of social security or pensions).