No-interest loans: Too good to be true?

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In a Nutshell

When you see an advertisement for a no-interest loan, it might look like an easy way to borrow money without having to worry about interest. While that may sometimes be the case, you aren’t necessarily getting “free” financing, especially if you make a late payment or can’t pay off your loan amount during the promotional period.
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While there truly are some no-interest loans out there, this does not mean zero cost. And many no-interest loans have catches that could cost you a pretty penny.

A no-interest loan means you are only paying back the principal — or the money you borrowed from the lender — without interest. But you’ll still want to be mindful if your loan includes any additional costs, like an origination fee.

In some cases, no-interest loans have introductory offers and the loan must be paid off in a specified period of time before interest kicks in. But before you apply, make sure to read the fine print, and keep in mind that you may not qualify for 0% interest financing without strong credit.

Loans that offer an introductory 0% interest for a set period of time also often come with what’s called deferred interest. That means if you make late payments or don’t pay off your balance within a certain timeframe, you may be charged interest retroactively on the entire balance.

You’ll often find introductory no-interest loan offers on furniture, electronics financing and auto loans.

Do no-interest loans exist?

“0% interest loans do exist, but a lot of them do have fine print that make them not as great as 0% or free sound,” says David Rae, certified financial planner and president and founder of DRM Wealth Management LLC in Los Angeles.

For example, if you miss a payment or don’t pay the loan in full by the end of the promotional period, you could be charged interest on the balance retroactively — sometimes at a high interest rate.

It’s also important to recognize the difference between interest and annual percentage rate, or APR. The interest rate is the percentage of your principal that you pay to borrow money, and it doesn’t reflect fees or other charges. The APR is a more comprehensive measure of the annual cost of borrowing, since it includes interest rate and other fees — because of this, it’s typically higher than your interest rate.

You can find no-interest loans available for a variety of purposes, including 0% APR auto loans, medical financing and large purchases. But remember, while some lenders don’t check credit, most do require good credit in order to qualify for the best rates.

Should I get a no-interest loan?

A no-interest loan, or a card with a no-interest intro period, can make sense if you’re certain that you can comfortably afford to repay your balance in full and on time to avoid paying interest. If you decide to apply for a no-interest loan, Rae suggests a few best practices.

  • Read all the fine print and make sure you’re familiar with any late fees and rules around interest, so you can ensure you don’t end up paying interest retroactively.
  • Make every minimum payment on time, and if it looks like that won’t be enough to pay off the balance by the end of the promotional 0% interest rate period, make larger payments if you can afford it.
  • Avoid the temptation to spend more than you can afford to pay off. Remember that the intro 0% interest rate won’t last forever.
  • Never miss a payment — this may cause your no-interest offer to disappear.

Where can I get a no-interest loan?

You can apply for a no-interest loan or intro no-interest loan in a variety of places, including an increasing number of retailers that now offer their own financing. Here are some of the places you may encounter a no-interest loan.

Furniture and electronics retailers

“One common place to encounter no-interest loan offers is from a retailer when you’re purchasing large household items, like a television or sofa,” Rae says.

These are almost always promotional offers. So if you miss a payment or if you don’t pay the loan off by the set time frame, you’re often responsible for paying interest on the remaining loan amount after the fact.

Medical providers

There are also lenders that offer no-interest loans for medical expenses, though they often require your medical provider to participate in their specific program. While some of these loans promise to remain interest free over the life of the loan, other medical lenders may increase your interest rate if you can’t pay your bill in full or on time.

Auto dealers

Some car dealerships offer no-interest auto loans to buyers with excellent credit in order to get people in the door. While some of these loans typically are interest-free, they’re not always the best option. Sometimes taking a no-interest loan from a car dealership means sacrificing other incentives like a manufacturer’s rebate, and your monthly payments could be higher depending on the loan terms.

Nonprofit interest-free loans

Some organizations and nonprofits also offer no-interest loans for people who need temporary or emergency assistance. For example, The International Association of Jewish Free Loans offers no-interest loans as a form of temporary assistance for people in financial need. The loans have to be for specific purposes, such as emergencies, home healthcare, children with special needs and shelter. This organization in particular is made up of a network of local agencies around the world.

Another example is the Air Force Aid Society, which provides no-interest loans to Air Force service members and families who are experiencing a financial emergency.

What are some alternatives to consider?

Ask family or close friend for a loan

If you have a close relationship with someone who’s in a financial position to help, you could consider asking them for a loan.

Before you do this, remember that disagreements over money can hurt relationships. Make sure you have a plan to repay your generous friend or family member. If possible, try to get the loan agreement in writing so that everyone is clear on the terms. You can learn more in our article about family loans.

401(k) account loan

Another alternative to consider is a 401(k) loan, if your plan allows for loans. A 401(k) loan allows you to borrow up to $10,000 or 50% of your vested account balance with a cap of $50,000, whichever is greater. The loan must be repaid within five years.

You’ll still have to pay interest, but the interest payments go back into your retirement account. And, even better, there’s no credit check required for the loan.

It sounds great, and it could be. But take some considerations before you go for it. First, not all plans allow for 401(k) loans. And if you leave your job for any reason, you may have to repay the loan in full or face tax consequences.

A personal loan from a credit union or bank

You could also consider getting a personal loan from a credit union or bank. If you already have a relationship with a financial institution, it may offer you discounts on origination fees or interest rates.

But not all financial institutions offer personal loans, and some only offer personal loans to people with strong credit.

You can learn more about credit union personal loans here and bank-issued personal loans here.

Credit cards that offer an introductory 0% APR

You may want to consider issuers that offer introductory 0% APR credit cards. These intro offers may be for balance transfers, purchases or both. If you qualify for one of these cards, you can receive a predetermined period with no interest — but after the promotional period ends, the card reverts to a regular APR which can be steep, depending on your credit.

Making purchases on a credit card that offers an introductory 0% APR on purchases and balance transfers might seem like a no-interest loan, and it is in many ways — if you pay off your balance in full and before the intro APR expires.

Because the intro 0% APR will go away, it’s critical to pay down the debt as much as you can and avoid making any new purchases before the rate increases.

If you’re using a no-interest credit card with an intro 0% APR for a balance transfer, you likely have to pay a balance transfer fee, which can be around 3% to 5% of the total amount you transfer, typically with a minimum fee of a few dollars — often $5 to $10. The fee is charged by the company that issues the credit card you transfer the debt to.

Bottom line

While you may find that no-interest loans are available for many different types of purchases, that doesn’t mean taking out a loan to begin with is a good idea. Ask yourself if the purchase is worth the debt — and whether you can comfortably afford to repay it — and then familiarize yourself with the fine print to make sure you can meet the criteria necessary to maintain your 0% intro rate. Otherwise, you could find yourself in more debt than expected.

Financial relief options during the coronavirus

Many peoples’ personal finances have taken a hit during the COVID-19 pandemic. If you’re worried about making your next auto loan payment or managing credit card debt, many lenders are offering relief right now.

You may also have some mortgage debt relief options or help with rent or even utilities during the coronavirus crisis.

About the author: Emily Starbuck Gerson is a full-time freelance writer in San Antonio who’s been covering personal finance since 2007. She has written for numerous national publications and enjoys helping people make better decisions … Read more.