What are Interest-Free Loans?
As the name implies, an interest-free loan allows you to borrow money and pay it back without paying interest. On its face, this type of loan can save you a substantial amount of money over a traditional personal loan with interest and can make it easier to know how much you can afford to borrow.
Traditional lenders generally do not offer interest-free loans. However, some retailers or medical providers may offer financing without interest if you buy their products – such as a furniture store or laser eye surgery center.
Keep in mind, an interest-free loan doesn’t necessarily eliminate all financing costs. There may be origination or prepayment fees. Some promotional loans may be interest-free for a designated time, but carrying a balance beyond that deadline can lead to fees and interest charges.
Where To Get Interest-Free Loans
Although you may be able to find a zero-interest personal loan from a traditional lender or credit union, those offers are virtually non-existent. In most cases, you’ll have to look elsewhere. Some universities offer interest-free loans to their students for financial emergencies.
Nonprofits may also be a good source, offering grants or loans with 0% interest. For example, the Jewish Free Loan Association offers interest-free loans for people to deal with medical bills and other emergency expenses.
Other interest-free loans take different forms. Many retailers (especially e-commerce stores) now offer buy now, pay later (BNPL) programs that allow you to finance your purchases over a short time (usually a month or so) without accruing interest. Affirm and Sezzle are two popular BNPL companies.
Another possibility is a cash advance app such as EarnIn, Chime or MoneyLion. The exact loan terms vary between lenders, but most offer some form of interest-free short-term financing. Depending on which one you choose, you could receive money within a business day or two.
Some of these organizations offer cash advances on your next paycheck if you can prove you have a steady income with direct deposit. Others eliminate the interest charges but require you to pay a small fee. You might need to open an account with these companies or link your bank account to prove you have a reliable income.
If you’re considering a cash advance before your next payday, an interest-free loan through a cash advance app may be a better choice than a payday loan. Traditional payday loans tend to have extremely high fees that make them an expensive option for fast financing.
>> Related: Learn more about interest-only HELOCs
How Interest-Free Loans Work
In general, interest-free loans follow the same pattern as traditional personal loans. The lender provides you the full loan amount in a lump sum, and you pay it back in monthly installments over a specified period.
The biggest difference is that you don’t have to pay interest charges. In other words, you only have to pay back the amount you borrowed, not the principal plus interest. However, interest-free loans may have late or prepayment fees or unavoidable origination fees.
A deferred-interest loan is a popular option. With this type of loan, the interest charges are deferred for a set period. If you pay off the full balance within that time frame, you won’t owe any interest. However, if you don’t repay the loan in full before the grace period ends, you may end up owing fees and/or retroactive interest from the entire term of the loan.
Promotional loans may also waive the interest for a set time. Many credit cards offer 0% APR financing for a specific time frame. After the interest-free promotional period ends, you’ll have to start paying interest on any balance you carry. The credit card agreement should detail any potential fees and tell you what APR you could pay following the promotional period.
>> Related: Learn more about good interest rates on a personal loan
How To Get an Interest-Free Loan
If you want to secure an interest-free loan, the first step is to research available lenders and organizations so you know what your options are and whether you may be eligible. For example, some universities only offer interest-free loans to students who can prove they have a financial emergency. Other lenders may have strict credit score requirements and/or limitations on how much you can borrow or what you can use the money for.
Once you have a list of loans you may qualify for, you can compare the lenders to see which one offers the best loan for your needs. Make sure to check whether there are fees, and find out how long the repayment term is. If the offer you’re considering is a deferred-interest loan, verify the amount of time you have to repay the balance to avoid paying interest charges. Follow these steps to apply:
- Research and compare organizations to find the offer that best meets your financial situation.
- Check your credit report and credit score to see if you qualify for an interest-free loan with the organization you prefer.
- If you’re not sure you’ll qualify because you have bad credit, consider paying off other debts first or reducing the amount you plan to apply for.
- Gather essential personal information and paperwork such as your photo I.D., pay stubs, bank statements and your Social Security number so the lender can run a credit check.
- Follow the lender’s application process, making sure to provide all the required information.
- Once your loan is approved and you have the money in your checking account, set up automatic payments to ensure you pay off the balance by the end of the loan term.
>> Related: Learn more about where to get a personal loan
Pros and Cons of Interest-Free Loans
Interest-free loans offer advantages and disadvantages, and it’s important to weigh all the potential outcomes before deciding whether to pursue this type of financing.
Pros
Saves money: Paying no interest on the loan balance can potentially save you a large amount of money.
Faster payoff: You may be able to pay off an interest-free loan faster than a traditional loan because each monthly payment goes entirely toward the principal balance.
Can help in emergencies: Some lenders (especially those offered by nonprofits or universities) offer interest-free loans based on financial need instead of traditional eligibility requirements.
Cons
Hard to find: Many lenders only offer interest-free loans for specific consumer products, so you may not be able to get a loan for the purchase you’re considering.
May have high fees: Some lenders charge high fees on interest-free loans.
May have strict terms: You may need an excellent credit history to meet strict eligibility requirements to qualify for an interest-free loan. These types of loans often have tight repayment schedules, and failing to meet them may incur fees, interest charges or a negative mark on your credit.
Alternatives to Interest-Free Loans
An interest-free loan may not be the only way to borrow money affordably.
Low-Interest Loan
A loan of this nature may be easier to find through a bank or traditional lender. These types of loans may be easier to qualify for, and combining a short repayment term with a low interest rate means you won’t be paying a significant amount over the principal balance.
Grants
Many nonprofit organizations offer grants and/or no-interest loans to borrowers who can demonstrate financial need. You might need to belong to a designated group (e.g., veterans). Another option is to borrow money from a friend or family member. This can be a good way to avoid interest and enjoy a lenient repayment process. However, there may be emotional pitfalls to navigate, and it’s crucial to borrow only from someone you trust completely.
Personal Savings
Finally, if you can wait for a little while to make the purchase you’re considering, you could adapt your budget to save up the money. With this approach, you don’t have to worry about qualifying for a loan or paying back the money over time. However, it may not always be feasible to save up the money, especially for a costly and/or time-sensitive purchase.
>> Related: Learn more about the best savings accounts
The Bottom Line
Obtaining an interest-free loan allows you to borrow money without the added cost of repaying interest charges.
Universities and nonprofit organizations may offer them to borrowers who can demonstrate financial need. Doctors or dentists may offer them to their patients, and other lenders, like car dealers and other retailers, may offer them as an incentive to get people to buy their products.
Although these types of loans aren’t commonly offered by banks and traditional lenders, you may be able to find one. To qualify, you may need a good credit score and/or reliable income. Lenders may have other eligibility requirements as well.
Getting an interest-free loan can save you money and allow you to pay for a purchase over time. Some of these loans have unavoidable fees, but they may still save you money over a traditional loan with interest. Many zero-interest loans are actually deferred-interest agreements. If you don’t repay the balance within the stated time, you may be subject to fees and/or interest charges. A promotional 0% APR offer from a credit card provider is similar.
There are other potential ways to borrow money without paying interest. You may be able to borrow from a friend or family member. Some nonprofit organizations also offer grants (which don’t need to be repaid) or zero-interest loans. Before you apply for any type of loan, take the time to research all the options and determine which one fits your financial situation best.
Frequently Asked Questions About Interest-Free Loans
The amount of interest you pay on a loan depends on many factors, including market conditions, your creditworthiness and whether the loan is secured (like mortgages, car loans and home equity loans) or unsecured (like personal loans and credit cards). To avoid high interest rates, you can look for a lender with a promotional offer, such as a 0% APR credit card, apply for a grant, or borrow from a friend or family member.
The interest rate you may pay on a personal loan depends on more than just the bank or lender you choose. Your credit score, debt-to-income (DTI) ratio and the amount you apply for can all affect your loan terms. DTI compares your monthly earnings to all existing loans you have.
Getting prequalified for your loan with multiple lenders can allow you to compare all the loan offers and choose the one with the lowest interest rate and best terms.
Each lender sets the eligibility requirements for a personal loan. In general, your credit score and DTI ratio can determine how easy it is for you to get a personal loan. If you are concerned that you may not qualify, look for lenders that consider other factors, such as education and financial need or allow you to apply with a cosigner.
Editor’s Note: Before making significant financial decisions, consider reviewing your options with someoneyou trust, such as a financial adviser, credit counselor or financial professional, since every person’s situation and needs are different.
If you have feedback or questions about this article, please email the MarketWatch Guides team at [email protected].
