Are Interest-Free Loans Really Interest-Free?

Credible Takeaways

Interest-free loans are personal loans that allow you to borrow money without having to pay interest.
Often, these loans have stipulations, like promotional periods at retailers. If you don’t pay off the loan before the end of the promotional period, you may have to pay interest.
Many lenders charge deferred interest at the end of the promotional period.
Deferred interest is the amount you would have paid in interest at the standard rate since you took out the loan.

If you take out a personal loan, you’ll typically make fixed monthly payments until the installment loan is paid in full — plus interest. But if you get an interest-free personal loan, you won’t have to pay interest on top of your principal balance.

What are interest-free loans?

Interest-free loans are personal loans that let you borrow money without additional interest charges. This means you’ll only be responsible for repaying the funds you borrowed. Sometimes these loans have specific eligibility requirements tied to what you use the loan for.

If you don’t follow the terms outlined in your loan agreement, you could end up paying interest on the original amount that you borrowed.

Related: How Do Personal Loans Work?

Keep in mind

Interest-free loans are sometimes tied to special offers that might entice you to take out the loan. If you don’t pay attention, you could end up paying interest in the long run.

For example, some auto dealers or furniture stores offer loans that charge no interest during a promotional period for a set amount of time. After this period ends, the loan’s regular interest rate kicks in and applies to your remaining balance.

Where can I get an interest-free loan?

Personal loans that truly charge no interest are rare, but there are some lenders that offer them. Some of these lenders include:

Universities. Certain universities provide emergency student loans that come with 0.00% APR. For example, The Marshall University Emergency Loan Program offers one loan up to $250 per semester for students experiencing a financial emergency.
Not-for-profit organizations. Some nonprofits and local organizations offer interest-free loans where you pay back only what you borrow. The Jewish Free Loan Association offers emergency loans, business loans, and education and wellness loans to a variety of borrowers with zero interest or fees.
Buy Now, Pay Later (BNPL) programs. Some retailers offer BNPL programs that provide interest-free loans for any shopping you do on their site. As long as you make payments as agreed — often in four biweekly payments — you won’t pay interest. However, most BNPL lenders charge hefty fees for late or missed payments.

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What to consider before taking out an interest-free loan

If you come across an offer for an interest-free loan, there’s a good chance that it comes with a catch. Before you sign the loan agreement, read the fine print in the offer letter, or ask your loan officer to explain the terms of the loan so you know exactly what you’re signing up for.

Here are some things to look out for:

Deferred interest

Deferred interest can be a big, unpleasant surprise if you end up owing it. The way a deferred interest promotion works is as follows. During the promotional period, interest is actually accruing at the standard rate on the balance.

But if you pay the original balance off (sans interest) before the period ends, you won't owe any of that accrued interest. If you don't pay the balance off, that accrued interest will become due, a.k.a. deferred interest.

Credit inquiries

The lender may perform a hard or soft credit inquiry to determine your eligibility for a loan. A soft credit inquiry won’t impact your credit, but a hard credit inquiry can temporarily lower your credit score by five points or less.

A small reduction in your credit score might not matter much to you. However, even a one-point drop in your credit score could be meaningful if you're applying for a mortgage.

Fees

Interest-free loans might have additional fees, such as late fees or prepayment penalties, which will impact the amount you have to repay. In some cases, you can avoid those fees. For example, you can avoid late fees by making your payments on time.

However, some lenders may charge other fees that can’t be avoided, so make sure you know what additional charges you’ll pay before taking out the loan. This way, you can prepare for any added expenses.

How to get an interest-free loan

Here are four steps to take to get an interest-free loan:

Review the eligibility requirements. Lenders will review your credit score and income to determine if you qualify for a loan. You’ll typically need a credit score of at least 620 to qualify for a personal loan, but you might be able to qualify even if you have poor or fair credit. If your credit score is less than ideal, you can increase your chances of getting approved by applying with a cosigner with good credit. Just keep in mind that if you fall behind on payments, your cosigner will be on the hook for repaying your loan.
Compare lenders and loan terms. Next, you’ll want to compare multiple lenders to find the best loan for your unique financial situation. Consider repayment terms, any additional fees, and if the lender will charge deferred interest.
Apply for the loan. Depending on the lender, you may be able to apply online, over the phone, or in person. Be prepared with documents such as your driver’s license or Social Security number, pay stubs, or recent bank statements.
Sign the loan agreement and get your funds. Once you’re approved for the loan, the lender will have you sign an agreement so they can release your funds. The time to get personal loans funded can range from one to two business days up to a week or longer.

Once you’re approved for the loan, keep track of your payments so that you can take advantage of the loan’s interest-free period. Make at least minimum payments on time, and double-check the terms and conditions to understand when the loan will begin accruing interest after the promotional period ends.

Learn More:

What are the benefits of interest-free loans?

Here are a few of the pros of taking out an interest-free loan:

Quick access to funds: An interest-free loan can be a great option if you need to make a purchase but don’t have the funds on hand. Many online lenders are able to disburse loan funds within one to two business days after approval.
Saving money on interest charges: Zero-interest loans can help you save money in the long run by allowing you to avoid paying additional interest costs.
Flexible eligibility requirements: Some lenders that offer interest-free loans may have little to no barriers to entry. For example, if you get a loan from a university, nonprofit, or community organization, you may only have to demonstrate a financial need to qualify.

Check Out: Best Same-Day Personal Loans

What are the downsides of interest-free loans?

While interest-free loans offer several benefits, here are some downsides to keep in mind:

Fees: Some interest-free loans may come with additional fees. Lenders may charge set-up fees, account maintenance fees, or late payment fees.
Negative impact on credit score: Another potential downside of an interest-free loan is that it can have a negative impact on your credit score if you fail to make payments or miss deadlines. Some lenders may report those missed payments to the three major credit bureaus — TransUnion, Experian, and Equifax. So, whenever you take out a loan, you should always be able to comfortably fit your payments into your budget.

Learn More:

Be careful when you borrow

You might also come across other types of loans — such as pawnshop loans, payday loans, or car title loans. If you have poor credit, these kinds of loans might be enticing as they typically don’t require a credit check. However, they can also be very risky.

Many of these loans come with very short repayment terms — often 30 days or less — as well as astronomically high interest rates and fees.

For example, payday loans can charge upwards of 400.00% APR. Because of this, these types of loans should only be a last resort after you’ve exhausted all of your other options.

Check Out: Payday Loans vs. Personal Loans

Should I get a no-interest loan?

A no-interest loan could be appealing if you’re looking to save money on your overall loan costs. But before you take out this kind of loan, it’s critical that you understand all of the terms so you aren’t stuck with high interest charges down the road.

If you’re considering a no-interest personal loan, here are a few questions to ask yourself first:

Is it actually a no-interest loan? Many so-called no-interest loans will charge interest if you don’t meet specific terms. For example, you might have to pay off your entire balance in a certain time period to avoid paying deferred interest.
Can you meet the loan terms? If you can’t fulfill the terms that will keep you from paying interest on the loan, consider whether taking out a standard personal loan or another kind of loan could be more cost-effective. If you decide to go ahead with an interest-free loan, make sure you can pay off the entire balance in that time frame.
Will you lose other perks? Some lenders — such as auto dealers — might forego other incentives for buyers who want to take advantage of the interest-free offer. For example, you might not have access to shorter repayment terms or manufacturer rebates.

Generally, if you can meet the requirements to avoid paying interest, an interest-free loan could be a good idea, as you’ll save money overall. But if the loan comes with terms that you can’t afford, then you’d likely be better off exploring other loan options.

If you decide to take out a standard personal loan, remember to consider as many lenders as possible to find the right loan for you.

Check Out: Best Personal Loans

Alternatives to 0% interest loans

If you find a personal loan that only requires you to repay the principal balance and nothing else, then you’ve found a great deal. But unfortunately, this isn’t the case for many of the interest-free loan offers you might come across.

If an interest-free loan doesn’t seem right for you, here are a few other options to consider:

Borrow money from family or friends

Borrowing money from family or friends can be a great alternative to an interest-free loan for many reasons. You won’t have to worry about additional fees or high interest rates, as these typically aren’t applicable when borrowing from family or friends.

This means you can save money on long-term repayment costs. Additionally, it may be easier to work out a flexible repayment plan with a relative or friend than with a traditional lender.

Save up instead

Saving up for a large purchase is often a better alternative to an interest-free loan. By saving money over time and avoiding taking on additional debt, you can spare yourself the burden of interest payments and high rates.

Saving up for a purchase can also help build your financial discipline, as you’ll be forced to live within your means and put off purchases until you can afford them.

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Dori Zinn contributed to the reporting for this article.

Meet the expert:

Janet Berry-Johnson

Janet Berry-Johnson has spent over 12 years in accounting and more than five years covering finance. Her work has been featured by The New York Times, Forbes, and Business Insider.