No-interest loans offer borrowers a way to obtain financing without the additional cost of interest. Instead, you are only responsible for paying back the original amount you borrowed, or the principal.
That may sound like a great deal, but financing offers that tout a 0% annual percentage rate (APR) often come with a catch: If you don’t follow the terms outlined in your loan agreement to the letter, you can end up paying interest on the full amount that you borrowed. In addition, some lenders charge fees for short-term zero-interest loans, which means you’ll end up paying back more than you borrow.
Read on to learn what no-interest loans are, how they work, and any potential costs that may be involved.
Are Interest-Free Personal Loans Real?
Yes. It is possible to get a personal loan with no interest. Also referred to as zero-interest or 0% APR loans, no-interest loans are essentially loans that let you borrow money without additional interest charges, provided you closely follow the loan’s terms and conditions.
What you can use a no-interest personal loan for will depend on the lender and type of loan you apply for. For example, some zero-interest loans, like certain auto loans, can only be used for financing a car, while others are only available for a specific retail purchase.
Interest-free loans aren’t necessarily cost-free, however. Some of these loans come with fees, such as a set-up, origination, or application fee. Also, many so-called “interest-free loans” charge something called deferred interest.
Deferred interest is a delay in interest charges for a set time period. If you pay off your loan balance in full by the end of the zero-interest term, you won’t pay any interest. If you don’t pay the loan in full by that time, the lender may charge retroactive interest charges going back to the day you took out the loan, even if you’ve already paid off a good portion of your balance.
If you get hit with any of these charges, an interest-free loan could end up being more expensive than a regular personal loan.
💡 Quick Tip: Some personal loan lenders can release your funds as quickly as the same day your loan is approved.
How Do Interest-Free Personal Loans Work?
With a standard personal loan, you pay back both the principal amount plus interest in regular (fixed) installments over the term of the loan. Interest is the cost of borrowing the funds. With a no-interest loan, however, you skip that additional interest charge. Instead, you only repay the original amount borrowed in regular installments.
Typically, no-interest loans have introductory offers that provide 0% APR for a set period of time. For example, a furniture or appliance store may say you can get interest-free financing for 24 months. If you don’t pay the balance in full by then, you’ll pay interest on any remaining balance (and, in some cases, the full balance).
Zero-interest loans are typically facilitated through third-party lenders, not by the stores themselves. These lenders may have specific eligibility criteria that borrowers must meet to qualify for 0%-interest personal loans, such as a certain minimum credit score, income level, and employment history.
No-Interest Loan Options
Here’s a look at some of the different types of 0-interest loans available.
Nonprofit Loan With No Interest
Some nonprofit and local organizations offer no-interest loans to people in financial need, individuals who have experienced emergencies, or businesses that operate in low-income communities. In some cases, there are strings attached, such as having to use the loan for a specific purpose.
In addition, some universities offer 0% APR emergency loans to students that are experiencing a financial emergency.
Medical Loans
Medical care can be expensive. To help make the cost of treatments and procedures more manageable, some doctors and medical practices participate in a no-interest loan program. While these services can be helpful, some charge a high interest rate if you don’t pay your bill in full by a certain deadline.
Recommended: How to Pay for Medical Bills You Can’t Afford
Car Loans
Some auto dealerships offer no-interest car loans to attract buyers. They may only do this at certain times of the year (to clear out space for new models) or when they want to get rid of slower-selling cars.
While a 0%-interest car loan is tempting, these loans often have shorter repayment terms, which means monthly payments may be high. Taking the 0-percent car financing deal could also mean missing out on incentives such as generous manufacturer rebates.
Recommended: Smarter Ways to Get a Car Loan
Retail Loans
Stores that sell furniture, appliances, electronics, and other big-ticket items will often offer no-interest loans to incentivize buyers to close a deal. But borrower beware: These loans often charge deferred interest, which means that if you don’t pay off the entire amount by a set time period, you’ll pay interest on the entire amount, even if you’ve already paid off most of the balance.
Buy Now, Pay Later Programs
Some online retailers offer buy now, pay later (BNPL) programs that provide interest-free loans for any shopping you do on their site. These plans often split up costs over several payments scheduled two to four weeks apart.
As long as you make payments as agreed, you typically won’t pay interest. However, if you miss a BNPL payment, you may be charged late fees and/or interest on your unpaid balance. Depending on the amount charged by the BNPL lender and how these fees are structured, they can add up quickly.
Pros of a 0%-Interest Personal Loan
Interest-free personal loans come with some significant advantages. Here are some to consider.
Complete a Purchase Without Waiting
An interest-free loan can make it possible to buy something you need now, even if you don’t have the available cash to cover the cost. Often, these loans allow you to pay for a purchase in multiple installments over time without any added expense.
Potential Savings in Interest Charges
A 0%-interest loan could help you save a significant amount of money in interest compared to putting a purchase on a credit card and carrying a balance over several months.
Flexible Qualification Requirements
Some lenders offer interest-free loans with a low bar to entry. Some BNPL companies, for example, won’t run a credit check. As long as you have a checking account with a positive balance and a steady paycheck, you may be able to get approved.
Cons of No-interest Personal Loans
Interest-free loans also have several potential downsides. Here are some you’ll want to keep in mind.
Fees
Some interest-free loans and BNPL apps offer no-interest loans but charge fees. Lenders may charge set-up fees, account maintenance fees, and/or late payment fees.
Deferred Interest
If you don’t follow the terms outlined in your loan agreement, you could end up paying interest on the original amount that you borrowed, not merely your unpaid balance.
Encourages Impulse Buying
Zero-interest loans, where you only need to repay the principal balance, often lure people into impulsively buying expensive items, like cars, appliances, and other luxury goods, they can’t really afford.
| Pros of a No-Interest Loan | Cons of a No-Interest Loan |
|---|---|
| Allows you to get a needed purchase right now | May come with fees that can increase the amount you have to repay |
| Saves money on interest | If you don’t pay in full by a set date, the lender may charge interest retroactively |
| May not require a credit check | Could encourage impulse purchasing |
Interest-Free Loan Alternatives
An interest-free loan may be a good idea for some borrowers. But they won’t fit everyone’s financial situation. Here are some alternatives you may want to consider.
Personal Loans
A traditional personal loan is money you can borrow from a bank, credit union, or online lender that can be used for nearly any purpose. Common uses include paying off credit card debt, financing a large purchase, covering emergency expenses, or paying for a major expense like a wedding or a home renovation.
A personal loan comes with a set repayment period and consistent monthly payments. Most personal loans are unsecured, so you won’t have to put down collateral to borrow the money. One of the biggest benefits of a personal loan is that they often charge lower fixed interest rates when compared to other forms of lending, like credit cards.
💡 Quick Tip: If you’ve got high-interest credit card debt, a personal loan is one way to get control of it. But you’ll want to make sure the loan’s interest rate is much lower than the credit cards’ rates — and that you can make the monthly payments.
0% APR Credit Card
With a 0% introductory purchase APR credit card, you won’t be charged interest on your purchases for a certain period of time, such as 12 or 18 months. If you use this type of card to make an expensive purchase and pay it off within the introductory period, it’s like an interest-free loan. At the end of the promotional period, however, any outstanding balance on your account would be subject to the regular purchase APR, and you’d be expected to pay the balance with interest.
Borrow Money From Loved Ones
Sometimes, asking a friend or family member for a loan might not be a bad option. As with any loan, you want to make sure you can repay it. Clear communication with a loved one in a strong financial situation — and perhaps a contract to define the terms of the loan, including whether or not interest will be charged — is a good way to keep money from hurting your relationship.
Recommended: Family Loans: Guide to Borrowing & Lending Money to Family
The Takeaway
Zero-interest loans do have their appeal. But they may cost you more than other financing alternatives in the end. Many zero-interest loan lenders charge fees. Plus, borrowers who fail to repay their balance before the interest-free period is over may face interest charges retroactive to the beginning of the loan term.
Before you jump at a 0-interest loan offer, it’s a good idea to take a close look at the terms of the deal, along with your budget. Are there any fees involved? If so, it may not be a great deal after all. Will you be able to meet the requirements necessary to maintain a 0% interest rate? If not, you may want to consider a more affordable alternative financing option.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.
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