How to get an interest-free loan


Updated on 15 November 2018 | 1 Comment

There's no such thing as an interest-free personal loan in the traditional sense. However, there are other simple ways to borrow money without paying any interest whatsoever.

There are a number of interest-free loans available on the market that will help you borrow money while keeping rising debt in check.

We're going to highlight seven ways you can get your hands on interest-free cash.

But be warned, not all of them are cheap.

Confused? We'll explain more as we run through each option, outlining all potential pitfalls (and fees) to look out for, so your 'free' loan doesn't drag you deeper into the financial mire.

By the way, if you've been comparing personal loans online, you won't have found these options.

That’s because providers don't label them as 'loans' at all!

1. An interest-free overdraft

Good for: reliable, truly cost-free credit whenever you need it

A number of current accounts offer a 0% interest overdraft facility.

How much can I borrow? That depends on the account you choose and your personal circumstances but we're generally talking about small amounts here.

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

Santander also offers fee-free arranged overdrafts for the first four months with its 123 Current Account. It also pays up to 3% cashback on certain household bills and 1.5% interest on in-credit balances up to £20,000.

To qualify for these perks, you need to be able to deposit at least £500 a month, set up at least two direct debits and pay a £5 monthly fee. There will be no overdraft usage fee for the first four months, after which time a 'usage fee' of £1 a day will be applied.

Alternately you can get a £500 overdraft from First Direct with its 1st Account, of which the first £250 is absolutely interest-free (with no limit on duration) - plus it offers generous switching bonuses including gadgets and holiday vouchers.

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, this 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 (First Direct is the exception here).

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 might be charged horrendous rates of interest (typically 20-30% APR) and possibly usage fees as well.

However, providers are starting to do away with punitive unauthorised overdraft fees, such as Lloyds Banking Group and Santander. 

Overdrafts: best current accounts for those who go overdrawn

2. A 0% new purchase credit card

Good for: moderate amounts of debt and single large purchases

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 money interest-free? This depends on the credit card. Currently, the longest 0% offer come from MBNA which offers a 30-month interest-free period.

Five different providers offer 28-month interest-free purchase cards.

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 APR of up to 20%) – 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.

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.

Have a look at the top 0% new purchase card offers

3. A 0% balance transfer credit card

Good for: consolidating and paying off credit card debt

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

How much can I borrow? As with a 0% new 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, you can get 36 months with this Halifax Balance Transfer Credit Card. For the latest best buys, read our guide to the best 0% balance transfer credit cards.

What to watch out for: While you'll temporarily eliminate interest payments on your debt, most of these cards are is not totally free.

The vast majority of balance transfer credit cards charge transfer fees of 1-3% of your total debt to move your money onto them (although there are some truly fee-free balance transfer cards available).

If you're willing to opt for a slightly lower 0% window, you could choose one of the few truly fee-free balance transfer deals out there. Currently, you can get this with this Santander Everyday 29-month card without paying a penny in fees.

As a final point, remember that 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!

Take a look at the balance transfer best buys

4. A 0% money transfer credit card

Good for: consolidating and paying off overdraft debt

If you have an expensive overdraft you want to pay off, you could clear it with a 0% money transfer credit card.

How much can I borrow? Again, this will depend on your financial situation.

How long is the cash interest-free? The top money transfer card offers an impressive 36 months interest-free.

Take a look at the Tesco Bank Clubcard 36 Month Balance Transfer Credit Card – or read our more in-depth guide to money transfer cards.

What to watch out for: Like with balance transfers, money transfer cards come with an up-front fee for securing the 0% rate. This will vary depending on which card you choose, but tend to be between 3% and 4%.

The only real difference between balance transfer and money transfer cards is that, with the latter, you’re transferring money from a credit card to a bank account, instead of transferring a debt from one credit card to another.

5. Klarna

Good for: small purchases you can pay off in a month

Klarna's 'Pay Later' offer is the only interest-free loan listed here which doesn't require a hard credit check and won't appear on your credit report.

You get 14 to 30 days to pay off a purchase, depending on the retailer. It only works with retailers that offer Klarna.

You don't get charged any interest or fees: however, failing to pay will harm your credit report.

Klarna also offers longer instalment plans via its 'Slice It' offer, some with interest attached. Read more about Klarna here.

6. PayPal Credit

Good for: immediate access to credit

If you need money today, PayPal Credit could be a good bet.

You apply online and it applies a credit limit to your PayPal account, usually within the same day, which can be used for online purchases from retailers that accept PayPal.

However, to make it interest-free, you need to spend above £150 in a single transaction. You'll then get 4-months interest-free in order to pay off your debt.

It's important to pay off your debt within that time because the usual interest rates are as expensive as an overdraft.

It's not available to those with a poor credit rating: we've included alternatives in our guide.

7. 118 118 Money's 'no interest' credit card

Good for: this is one to avoid; we've included it because you may well run into it online.

118 118 Money offers a credit card which charges no interest; instead, you pay a monthly fee, starting at £8 a month and rising to £17.

It has no other fees at all and is available to those with a poor credit rating.

Unfortunately, because of low credit limits - you start on £250 and can go up to £1,200 - it's a disproportionally expensive way to borrow, with effective interest rates of 34.5% minimum. That's higher than many other credit-repair credit cards.

Read more about the 118 118 Money card here.

Longer-term, low-rate solutions

As you can see, all these are relatively short-term borrowing solutions.

If you need a low-interest repayment plan that lasts longer, a 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 article is regularly updated

Cut the cost of your borrowing:

The best 0% purchase credit cards

The best 0% balance transfer credit cards

How to build an excellent credit history

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