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What is a No-Interest Loan? A Personal Loan Guide

By Ashley Kilroy · March 09, 2022 · 7 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

What is a No-Interest Loan? A Personal Loan Guide

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 simple: You just need to get personal loans with zero interest. Then, you don’t have to worry about additional interest payments. But these loans can be a little more complex than they sound. In particular, they can feature potential underlying fees and deferred interest.

Read on to find out if this low-cost financing method works for you and your financial needs.

Are Interest-Free Personal Loans Real?

While it is possible to find a loan advertised as no interest, you will still face some cost. Many of these loans hide hidden fees or include catches that you may have to pay.

For example, your interest-free personal loan may require an origination fee. This is essentially an upfront fee that lenders charge to cover the cost of reviewing your loan application and paying the subsequent funds. Rather than a flat rate, origination fees are usually 1% to 8% of your total loan.

How Do Interest-Free Personal Loans Work?

With a traditional personal loan, you pay back both the principal amount as well as any interest. The latter is, essentially, a charge to cover the cost of borrowing the funds. But with a no-interest loan, you skip that additional interest charge. Instead, you only repay the original amount borrowed.

While that may sound like having your cake and eating it, too, these loans often come with underlying costs. For example, certain no-interest loans charge you deferred interest. This does not apply to a borrower who pays their entire loan balance by the end of the introductory term. However, if you fail, you may have to pay retroactive charges in the form of interest, i.e., the deferred interest. And these charges may go all the way back to the start of the loan.

No-Interest Loan Options

Loans with zero interest can be hard to find, but they do exist. However, they tend to mostly be available to consumers who want to buy high-priced services or goods. Here are some ways to use a personal loan with zero interest or places to find them.

Nonprofit Loan With No Interest

There are some nonprofit groups or organizations that offer no-interest loans to people in financial need who may have limited funds due to a temporary situation or because of a sudden emergency. In this case, the loan acts as a form of financial assistance.

While this is helpful, the borrower often needs to use the loan for a specific purpose — they don’t have the freedom to use it wherever. Instead, it needs to go to expenses such as shelter, healthcare, or support for children with special needs.

Medical Loans

In some situations, you may find a lender who provides no-interest loans for medical expenses. However, they usually require the participation of your medical provider for you to qualify.

This type of loan may be exactly what it claims: interest-free payments over the loan’s life. But some medical lenders use late or partial payments as a reason to increase the rate.

In addition, medical loans tend to be more common for specific procedures. In particular, you may have a better chance of receiving a medical loan to cover medical bills for elective procedures that your insurance doesn’t cover. That can include LASIK, plastic surgery, or cosmetic dentistry.

Recommended: How to Pay for Medical Bills You Can’t Afford

Car Loans

Occasionally, auto deals offer no-interest car loans to buyers with excellent credit scores. They usually use this as an incentive to attract potential customers. They also use it during the summer when they want to clear out space for new models or to get rid of slower-selling cars. While they are tempting at 0%, they may not always be the best deal.

By taking a no-interest loan, a potential buyer may lose out on other valuable benefits. For instance, they might miss a manufacturer’s rebate or face higher monthly payments, depending on the loan terms.

Recommended: Smarter Ways to Get a Car Loan

Retail Loans

Stores sometimes offer 0%-interest loans if they commonly sell expensive items, such as jewelry, electronics, or furniture.

While these loans seem interest-free, many of them actually only offer deferred interest. So, the only way they stay interest free is if you pay them off before their promotional period ends.

Pros of a 0%-Interest Personal Loan

A zero-interest personal loan comes with a significant advantage over other types of financing. By not requiring interest payments for a period, they can be incredibly beneficial. They offer cost-effective bonuses like:

Saving Money

While they have a time limit, interest-free loans can offer an easy way to save money. As long as you pay off your balance before the introductory period ends, you should be fine. That way, you benefit from the initial no-interest offer, and you don’t get hit with any delayed interest, saving you money compared to a regular personal loan or another financing.

Affordability

Expensive purchases can be challenging to save up for, even over time. And you may not be willing to wait several years, especially if the purchase could improve your quality of life, like LASIK. An interest-free loan gives you quick access to an item or procedure you want when you most need it.

Cons of No-interest Personal Loans

While a zero-interest loan offers a lot in the way of saving money, it’s not perfect. It’s important to consider the potential pitfalls of this financing before applying for a loan.

Good Credit Score Required

You might be familiar with personal loans based on income. However, there are other requirements that borrowers must meet to qualify for a zero-interest loan. In particular, applicants typically need excellent credit scores to qualify for a no-interest loan. Unfortunately, that means a loan with no interest might not be accessible to people with poor or no credit.

Not having great credit doesn’t necessarily mean you won’t qualify for an interest-free personal loan. Some lenders may not require a credit check. Others may have looser credit score requirements. In the end, it depends on the lender and the type of no-interest loan you want.

Lack of Product Diversity

There’s a reason you only find 0% interest loans in certain situations. Companies use them to sell higher-priced products to consumers who typically can’t afford them. As a result, you probably won’t find an interest-free loan for commonplace or everyday goods.

Not Truly Free

Part of the appeal of an interest-free loan is the advertising. Companies use flashy slogans and visuals to make you think the loan is completely free. But there are often underlying fees and charges that the consumer has to pay in some way.

Challenging Requirements

Interest-free loans are only interest-free on the surface. While some borrowers may benefit from the offer, others may not be able to keep up with the rigorous requirements. In addition, you could owe interest charges if you don’t pay off the entire loan balance by a specific date. This can also happen if you make a payment late.

Like any financial move, consider the pros and cons of personal loans with zero interest before you decide either way. Some may not mind a few challenging requirements as long as they have that initial interest-free period.

Pros of a No-Interest Loan

Cons of a No-Interest Loan

Complete the purchase without waitingCould encourage impulse purchasing
Potential savings in interest chargesPossibly retroactive interest if not paid before promotional period ends
Funds to purchase needed itemUse of funds may be restricted to certain item
Loan term may be shorterMay not qualify for manufacturer rebates

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 worth consideration.

Personal Loans

Interest-free loans aren’t the only type of loan out there. You can also get a traditional personal loan from a bank or credit union. This may be easier if you apply for a loan from an institution you have an established relationship with. If they have experience doing business with you, they may offer you more favorable interest rates or a discount on fees. Applying for loans with no bank account or prior experience at the institution won’t necessarily hurt, but it may mean losing out on certain benefits.

Not every financial institution offers a personal loan, though, or one with the terms you need. For instance, a bank may only approve borrowers with excellent credit scores. Or, they may only offer personal loans up to a certain amount.

Recommended: What Is a Personal Loan?

0% APR Credit Card

Just as some lenders offer no-interest introductory periods for loans, credit card issuers may use a similar tactic of offering 0% APR credit cards. Sometimes, these offers only apply to select services, like a balance transfer or purchases within a specified date range. But it is possible to find a credit card that applies 0% APR on both.

If you qualify for a credit card promotion like this, you can use the card free of interest for a set timeframe. After that period ends, the card applies a regular APR, which varies.

This may seem like a simple way to get the same benefits as a personal loan with zero interest. The financial incentive exists only if you pay the balance in full before the promotional period ends.

In addition, if you use a promotional-rate credit card to transfer a balance from another card, be aware of how much the balance transfer fee is. This fee is typically 3% to 5% of the total transferred amount. While those percentages may seem low, the actual dollar amounts may be high.

Recommended: The Basics of Balance Transfer Credit Cards

Grants

Some applicants may want to consider a need-based loan or grant, mainly if a credit card or personal loan is a bad financial move for them. Nonprofit organizations that offer interest-free loans frequently serve specific groups such as military veterans or religious groups who may require additional support. They may also offer need-based grants to individuals.

There are also grant programs that aren’t need-based, which can provide options to people who need money for things other than expensive services or goods. For example, you may be able to get a grant to help you with your student loans if you meet certain qualifications.

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 — 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. 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.

As a result, you may want to explore your options before choosing a no-interest loan. One option you may want to consider is a personal loan through SoFi. SoFi offers competitive personal loan rates and no fees. And with a fixed-rate personal loan that has a payment end date, you won’t have to rush to pay the balance before a certain date to avoid extra costs.

Learn more about personal loans from SoFi

Photo credit: iStock/MicroStockHub


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