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Ways to get an interest-free loan

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Last updated on

31 July 2014

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Here are three routes to interest-free money that won't be found in the 'loans' section of your bank!

The words 'interest-free credit' often equal enormous, scary hidden catches. Anyway, in a perfect world, we'd all live within our means and never spend money we didn't have.

Unfortunately, that's not always how it works. But genuinely interest-free loan deals do exist – and when you really need to access extra cash, they can be an economical and useful financial tool.

They can also help you get your finances back under control, by chopping the amount of interest you're already paying on debts.

Here, we're going to highlight three good ways of getting interest-free cash. We'll also outline the pitfalls you need to watch out for – so your 'free' money doesn't drag you deeper into the financial mire.

By the way, if you've been hunting through the personal loans section, you won't have found these options. In fact, providers don't label them as 'loans' at all!

1) An interest-free overdraft

Some current accounts have a 0% interest overdraft facility included in the package.

How much can I borrow? It depends on the account you go for, and your personal circumstances.

Nationwide gives an example of £1,200 on its FlexDirect account, which charges no interest at all and no fees for the first 12 months.

There are also two Santander accounts that offer fee-free overdrafts: the 123 Current Account and the Everyday Current Account.

To qualify for the Santander 123 account, you need to be able to pay in £500 a month, every month, and you'll have to pay an account fee of £2 a month. Then you'll get an interest-free overdraft for four months so long as you use the bank's 'dedicated switching service' to transfer over your direct debits.

As a bonus, you will earn cashback on the direct debits you set up from the account – 1% on water, Council Tax bills and Santander mortgage repayments (if you have one), 2% on gas and electricity bills and 3% on communications bills such as phone, broadband and digital TV – which should cancel out the monthly fee.

With the Santander Everyday account, you can get the same interest-free overdraft of up to £1,200 for four months but you don’t have to pay the £2 monthly fee and you won’t earn cashback.

After four months, both accounts will apply a 'usage fee' of £1 a day.

Alternatively you can get a £500 overdraft from First Direct with its 1st Account, of which the first £250 is absolutely interest-free.

Remember that the size of the interest-free overdraft you're offered will also depend on your credit rating.

How long is the cash interest-free? Again, it depends on the account, but borrowing via a 0% overdraft is definitely not a long-term borrowing solution. Unless you are a student, the majority of current accounts will only let you have an interest-free overdraft for the first few months.

After this, you'll be charged substantial interest on your remaining negative balance (or in some cases a fixed daily fee) so you need to make sure you've paid off your debt within the 0% period.

What to watch out for: It's very important you don't exceed your 0% overdraft limit. Doing so will push you into an 'unauthorised' overdraft – on which you'll be charged horrendous rates of interest (typically 20-30% APR) and possibly usage fees as well.

2) A 0% on purchases credit card

The other main way of getting a totally 'free' loan is to take out a credit card that offers 0% interest on new purchases.

How much can I borrow? A credit card will normally indicate what its maximum credit limit is before you apply. However, the credit limit you're offered might be much lower, and (like an overdraft) will depend on your personal financial circumstances.

How long is the cash interest-free? This depends on the credit card. At the moment, the market-leader is the Tesco Clubcard Credit Card for Purchases, which offers 0% interest for 19 months.

After that there’s the Santander 123 Credit Card and the Santander Credit Card for Purchases, both of which offer 18 months of 0% interest. The Sainsbury’s 16-Month Nectar Purchase card comes with a 16-month 0% period, while the Marks & Spencer Bank MasterCard and Nationwide Purchase Credit Card both come with 15-month 0% periods.

So again, as you can only borrow interest-free for up to 19 months, it's not a long-term borrowing solution.

What to watch out for: When your 0% deal ends, you'll be charged a very high level of interest on your remaining balance (typically 15-20+% APR) – so it's crucial you clear your balance before this happens.

If you do still have a balance remaining when your 0% deal ends, you could try to take out 0% balance transfer card (see below) and shift the leftover debts across to it.

However, this is a risky strategy. We all know how much lenders have tightened up on giving credit, and there's no guarantee you'll be one of the lucky ones!

You also need to make absolutely sure you make the minimum repayments every month (more if you can afford it). If you're late or default on a payment, you may well be fined, and your 0% deal is likely to be whipped away from you.

3) A 0% balance transfer credit card

If you're already paying interest on a debt, you could turn it into an interest-free loan by shifting it onto a credit card offering 0% on balance transfers.

How much can I borrow? As with a 0% purchase card, a 0% balance transfer credit card will normally indicate what its maximum credit limit is before you apply. However, the credit limit you're offered will depend largely on your credit rating and salary.

How long is the cash interest-free? Again, this depends on which card you choose. At the moment, the longest general balance transfer deal is on offer from Barclaycard. It lasts for 33 months (with a 2.79% balance transfer fee). After this, the typical APR is 18.9%.

There are a host of other cards offering more than 30 months interest free. For the latest best buys, read The best 0% balance transfer credit cards.

For a good combination of 0% period and balance transfer fee, the Bank of Scotland PlatinumLloyds Bank Platinum, Halifax 24-Month Credit Card and TSB Platinum cards offer 24 months with no interest to pay for a 1.5% fee.

What to watch out for: While you'll temporarily eliminate interest payments on your debt, this is not totally free money. The vast majority of balance transfer credit cards charge transfer fees of 2-3% of your total debt to move your money onto them.

More importantly, if you don't manage to clear your debt during the 0% period, you'll be saddled with big interest charges. Rates will typically be between 15-20% APR – but there are plenty of horror stories about people being charged 30% APR or even more!

And again, make absolutely sure you make (at the very least) the minimum payments every single month. Otherwise, you could end up with a fine and a hefty rate of interest on that large balance!

A longer-term, low-rate solution

As you can see, all these are relatively short-term borrowing solutions. If you need a low-interest repayment plan lasting longer than a year, a long-term, low rate credit card might be a better solution for you.

Alternatively, if you need to borrow a larger sum of money you may qualify for a low-rate personal loan.

This is a classic article that is regularly updated

Compare credit cards and current accounts with lovemoney

More on borrowing

The best 0% balance transfer credit cards

The best 0% purchase credit cards

How to build an excellent credit history

Where to get free debt advice

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