At a Glance
Whether you’re looking to make a large purchase or need help with a bill or unexpected expenses, you may see options for no-interest loans. These loans allow you to repay what you borrowed without paying interest, saving you money compared to a traditional loan, but there’s a catch. In most cases, you must closely follow the terms, conditions, and regulations set by the lender or face interest charges, fees, and/or other penalties that can be costly.
Read on to learn more about:
What is a no-interest loan?
No-interest loans provide extra cash to help pay for an unexpected expense or pay for a large purchase or bill. With a no-interest loan, you only pay back the money you borrowed – there is no interest. However, these loans often have specific terms and conditions to follow and usually come with additional fees that increase the amount you must repay. In some cases, these loans have introductory offers that have 0% APR for a set period, and in other cases, they have no-interest for the life of the loan.
Do no-interest loans exist?
Yes, no-interest loans exist from a few different types of lenders. Requirements vary based on the loan type, so some borrowers may not be eligible, but you can get a no-interest loan from places like auto dealers, non-profits, cash advance apps, buy-now-pay-later lenders, or other online lenders.
How do no-interest loans work?
A no-interest loan lets you skip paying interest and instead only repay the principal amount. However, there can be a few catches such as:
- Deferred interest is a delay in interest charges for a certain period, so if you don’t follow the loan’s terms and conditions exactly, you may end up being charged interest.
With deferred interest, if you pay off your loan balance in full before the end of the term, you won’t pay interest. However, if you don’t repay the loan by then, you could be charged retroactive interest charges going back to when you first took out the loan. It’s important to know when the loan is due and repay the loan before that date to avoid these interest charges.
Other types of no-interest loans don’t charge interest at all as long as you follow the terms and conditions of the loan closely. Otherwise, these loans can cost a lot more than the original borrowed amount.
Should I get a no-interest loan?
No-interest loans may seem like the perfect option for borrowing money, but it’s important to completely understand the loan’s terms and conditions to avoid deferred interest or other charges, as this can make the loan more costly. Additionally, you’ll want to make sure you meet all the requirements for the loan, such as having proof of income, a bank account, or others.
No-interest loans can also have an impact on your credit as some lenders report missed payments to the credit bureaus, which can bring your score down.
You should only get a no-interest loan if:
- You meet the lender’s requirements.
- You’ve explored all your other options/alternatives.
- You can make the loan payments on time and repay the loan by the end of the term.
Where can you get loans for no-interest?
A few types of no-interest loans include those from:
1. Auto dealers
Some car dealerships offer no-interest loans for a new or used vehicle, though these typically have shorter terms, so the monthly payments are higher. Additionally, they may disqualify you from other incentives like manufacturer rebates. The upside to these loans is they don’t charge deferred interest, but they are secured, so if you don’t make the payments, you could lose the vehicle.
Related: Personal Loan vs Auto Loan
2. Furniture and electronic dealers
If you’re buying a large piece of furniture or costly electronics, you’ll likely find no-interest loans offered at these retail establishments. Typically, these loans have deferred interest, so if you don’t pay off the purchase in full by the end of the promotional period, you’ll pay interest on the entire amount. Make sure you know how long the promotional period is and ensure you’re able to pay off the item before that period ends to avoid additional charges.
Some non-profit organizations offer no-interest loans to people or families in need, but like other lenders, they may charge deferred interest or fees if the loan isn’t repaid on time. These can be a great option if you’re struggling to pay for things like rent, food, or utilities, but be sure you can repay the loan before the end of the term.
4. Medical providers
Medical bills can be expensive, and even more so if you don’t have health insurance. Sometimes, the cost of care deters people from getting the help they need. However, some doctors or medical providers offer a no-interest loan program to their patients to help them get more affordable care. However, like other types of no-interest loans, the no interest may only last a certain period of time, so you’ll want to ensure the loan is repaid prior to the end of the term.
Alternative loan options
Before taking out a no-interest loan, it’s important to consider your alternatives to ensure you’re making the right choice for your financial situation. A few other types of loans to explore include:
1. Personal loans
Personal loans are a type of loan that can be borrowed from a bank, credit union, or online lender. With loan amounts ranging from $1,000 to $100,000 and terms from 12 to 84 months, personal loans can be a great option for larger purchases or for borrowers who need more time to repay the loan. These funds can be used for just about anything, and with some lenders offering same-day or next-day funding, you may be able to get the loan funds fast.
The potential downside is personal loan lenders consider your credit score, credit history, income, and other factors to determine your eligibility and interest rate. You’ll pay interest on the balance of these loans, but the better your credit score, the lower the interest you’ll pay.
2. Loans from friends and family
Consider borrowing money from friends or family members before taking out a loan from a financial institution. These loans typically have more flexible repayment options and don’t charge interest. However, be sure your borrowing won’t put a financial hardship on the one you borrowed from. Additionally, it’s important to repay the loan as quickly as possible to avoid damaging any relationships with your loved ones.
3. Credit union personal loans
Credit union personal loans are a type of personal loan you can get from a credit union. Because you must be a member of a credit union to apply, these loans are considered “private loans” and the lender doesn’t rely on your credit score and history for you to qualify. These loans also typically have lower rates and fees, and like traditional personal loans, the funds can be used for just about anything.
Learn more: Credit Union Personal Loans
4. Zero (0%) APR credit cards
The 0% APR credit cards work like no-interest loans, but it’s a credit card instead of a loan. These credit cards come with a 0% APR introductory offer, so you don’t pay interest on the balance for a certain period. This makes it easier to make a large purchase using the card because you don’t have to pay it off in full within the 30-day window. However, you’ll want to pay off the full balance before the introductory period is over or you’ll be charged a high-interest rate on the outstanding balance.
Related: Credit Cards with No Annual Fee
5. A 401(k) loan
A 401(k) loan is a type of loan that allows you to borrow money from your 401(k)-retirement fund. Typically, you can borrow up to 50% of the balance for up to five years, or a maximum of $50,000. These loans usually have low-interest rates, and the interest you pay goes back into your own account. Plus, with no credit check required, there’s no impact on your credit score.
The biggest downside to these loans is that you’re taking away retirement savings and risking losing growth on those funds. Additionally, you also risk penalties and taxes.
Related: 401(k) Loan
Are no-interest loans a good idea?
If you are sure, you can repay the loan by the end of the no-interest period or loan term, no-interest loans can be a good option. It’s important to read the terms and conditions of the loan carefully to know if there are any rules you should be following, deadlines, or fees. Only borrow what you need and ensure you make every payment on time each month. Remember, the 0% interest rate is temporary, so you’ll want to pay off the loan in full to avoid deferred interest charges.
On the other hand, if you won’t be able to make payments each month or repay the loan in full before the no-interest period ends, these loans may not be a good idea for you because they can be very costly and make it more difficult to get out of debt.
A loan without interest can be called an interest-free loan, no-interest loan, or soft loan. You may also hear them referred to as soft financing or concessional funding.
An interest-free loan is only a good idea if you can repay the loan within the term, or 0% interest promotional period. Making late payments or not paying off the loan in full can affect your credit, and it can also lead to fees, penalties, or deferred interest charges that can make the loan much more expensive than it originally was. Be sure to read the terms and conditions of the loan completely and ask the lender any questions you may have before borrowing.
When you apply for a loan it triggers a hard credit inquiry, which will temporarily decrease your credit score by a few points. If you make your payments on time and in full, interest-free financing can help your credit since you’ll have a positive payment history and an improved credit mix. On the other hand, late or missed payments can significantly decrease your score.
When you borrow an interest-free loan, you’ll repay the principal amount each month and won’t be charged interest. However, for most of these loans the interest is just deferred, meaning the interest charges are delayed for a certain period. If you pay off the loan by the end of the term, you won’t pay any interest. Otherwise, if you still have a balance, you’ll be charged interest on the remaining balance and potentially retroactive interest charges going back to when you first took out the loan.
This depends on the lender and the type of no-interest loan you have. For example, some loans may have no interest for up to 24 or 36 months. Others may be shorter at 12 months. Make sure you understand how long the loan is interest-free before getting it, so you know how long you must avoid charges.