How to get an interest-free loan: cheap and free borrowing

Updated on 23 September 2020 | 2 Comments

While there's no such thing as an interest-free personal loan, it is possible to borrow money without paying any interest whatsoever. Here are five cheap or free ways to borrow.

There are a number of truly interest-free loans available on the market that will help you borrow money cheaply or simply keep existing debt in check.

We're going to highlight the various ways you can access interest-free credit.

But be warned, not all of them are truly free as there could be some hidden fees involved.

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

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!

If you've been in debt for a long time now, or are going further into the red, we've put together a guide to getting out of debt and the help available.

As a final point, these options are really only suitable for small to moderate sums: if you need to borrow thousands of pounds then an interest-charging personal loan might be your best bet.

1. An interest-free overdraft

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

A small number of current accounts currently offer a 0% interest overdraft facility, although they could soon be pulled as a result of the new overdraft rules on borrowing costs.

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

For example, Nationwide gives an arranged overdraft of up to £1,200 on its FlexDirect account, which charges no interest at all and no fees for the first 12 months (39.9% EAR thereafter).

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? This depends on the account but borrowing via a 0% overdraft is definitely not a long-term borrowing solution.

Unless you are a student, most current accounts will only let you have an interest-free overdraft for a few months or even a year.

After this, you'll be charged interest on your remaining negative balance, so you need to make sure you've paid off your debt within the 0% period.

What to watch out for: While the Financial Conduct Authority (FCA) has replaced authorised and unauthorised costs with one standard rate, several banks have hiked overdraft rates to up to 40%.

Although some banks have decided to not implement these hikes due to the COVID-19 pandemic, this is only temporary.

You can learn more about what's changing in our guide to the best current accounts for those who go overdrawn.

Debit cards. (Image: Shutterstock)

2. A 0% new purchase credit card

Good for: single large purchases

The other main way of getting a totally 'free' loan is to take out a credit card that charges 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. The credit limit you are offered might be much lower, and (similar to an overdraft) will depend on your personal financial circumstances.

How long is the money interest-free? This depends on the credit card. Currently, providers are offering up to 26 months interest-free on new purchases, but the top rates can change on a regular basis. You can check out the top 0% purchase credit cards here.

What to watch out for: When your 0% deal ends, you'll usually be charged a very high level of interest on your remaining balance (typically APR of around 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 a 0% balance transfer card (more on that in the next section) and shift the leftover debt across to it.

You also need to make absolutely sure you make the minimum repayments every month (and more if you can afford it).

If you're late or default on a payment, you may incur a fee, and your 0% deal is likely to be whipped away from you.

Finally, note that the longest 0% purchase cards tend to be reserved for those with the very best credit rating.

3. A 0% balance transfer credit card

Good for: consolidating and paying off credit card debt

If you're already paying interest on 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? Similar to a 0% new purchase card, a 0% balance transfer credit card will normally indicate what its maximum credit limit is before you apply.

The credit limit on offer will depend largely on your credit rating, so don't automatically assume you'll get the maximum amount.

How long is the cash interest-free? Again, this depends on which card you choose, but with these cards it's important you focus on the fee as well as the 0% window to decide what's best for you.

While TSB offers the longest balance transfer period of up to 29 months (at the time of writing), it charges a hefty fee of 2.95%.

If you’re willing to sacrifice four months in an interest-free period, HSBC’s Balance Transfer Credit Card offers a lower fee of 1.5%.

For 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 not totally free.

The majority of balance transfer credit cards charge transfer fees of around 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.

NatWest/RBS also offers a credit card with the longest fee-free balance transfer period at 20 months, but this is only open to existing customers, so it's not a practical option for most.

If you are keen, MoneySavingExpert suggests opening a Cash ISA with either bank (depositing £1) to qualify ­– but you should make sure the Cash ISA and credit card are right for you first.

Santander Everyday Credit Card also offers one of the longest fee-free balance transfer periods at 18 months. 

Unlike other balance transfer cards on the market, you won’t get charged for transfers over the full 18-month period (others charge a fee if you don't switch debt within the first few months of getting the card).

As a final point, remember if you don't manage to clear your debt during the 0% period, you'll be saddled with big interest charges.

Rates will typically revert to between 18% and 22% APR – but there are plenty of horror stories about people being charged up to 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!

Couple using a credit card to buy something. (Image: Shutterstock)

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 at the time of writing is the MBNA Long 0% Money Transfer Credit Card with 0% interest on money transfers for up to 18 months. The card has a 2.99% money transfer fee.

What to watch out for: Like with balance transfers, money transfer cards come with an upfront fee for securing the 0% rate. This will vary depending on which card you choose, but they are generally higher than balance transfer fees and can be up to 4% of the total sum borrowed.

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 (so you have money to spend as you wish), instead of transferring debt from one credit card to another.

5. PayPal Credit

Good for: immediate access to credit

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

You spend over £99 in one go with PayPal Credit and automatically get 0% interest on that purchase for four months. You can use this offer again for every purchase over £99.

It's important to pay off your debt within that time as the usual interest rate can be expensive. Also, it's not available to those with a poor credit rating – we've included alternatives in our guide.

Longer-term, low-rate solutions

As you can see, all of 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.

And again, if you're borrowing more money to pay off existing debts, it may be time to seek help with your debts



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