How To Plan Around A No Interest Loan
Posted on February 14, 2021 in Loans
Some words are always linked together. When you say one, the other comes naturally right behind it. Like thunder and lightning or peanut butter and jelly, there is also loan and interest.
Just about everyone knows that when you take out a loan, you are expected to pay back the amount borrowed plus a percentage of what was borrowed. This is called interest.
However, there does exist something called a no-interest loan. Although rarer than a traditional loan, they are still available in some cases and definitely worth considering if offered.
What Is A No Interest Loan?
What exactly does it mean for a loan to be considered no interest? Well, it means pretty much exactly how it sounds: Anyone who takes out a no-interest loan would only be paying back the principal amount, which is another term for the total amount borrowed.
This begs the question: Why would a lender offer a loan that would only give them their money back? Well, that is because when it comes to no-interest loans, there are often a few catches in the fine print.
Sometimes the loan may be no-interest for the loan duration, but there will be an origination fee, which is usually between 1% to 8% of the total amount borrowed. So while not technically being interest from the loan, it basically operates the same way.
Another tactic is that a loan is only no-interest if paid back before a certain amount of time has passed. This is most commonly used with car loans and credit cards for promotional periods.
Sometimes they will come with deferred interest attached, which means if payments are made late, or the balance is not paid off in time, then interest can be charged retroactively on the entire balance. All of these tactics are legal and very common for no-interest loans, so it is extremely important to read the fine print and know exactly what you are signing up for when accepting a no-interest loan and its terms.
Tips For Taking Out A No Interest Loan
Despite some of the potential pitfalls involved with taking out a no-interest loan, they can still do a lot in terms of saving money and are worth considering if offered. Here are some tips to keep in mind to make sure you can get the best out of a no-interest loan and not end up in financial hot water:
- Read All Terms Thoroughly
As mentioned before, there can be many additional caveats and conditions found in the fine print of a no-interest loan.
One of the most common is a time limit for no interest. When it comes to larger purchases that will take multiple years to pay off (like a new car), the interest is often 0% for the first year. That would help push someone into purchasing the expensive item. However, after that first year, the interest rate can kick in and may be higher than if the loan was taken with traditional interest factored in from the beginning.
Origination fees are also standard and can account for several percent of the total amount of the loan. Though it operates as an interest rate, it would technically not be interest, so the claim of being “no interest” would still be accurate.
- Make Each Payment On Time
It is always recommended that every loan taken out is paid back on time with at least the minimum monthly payment. Regarding credit reports, payment history is 35%, so missing just one payment can negatively impact your credit score.
Concerning no-interest loans, this could trigger the consequence of the loan losing its no-interest status depending on the terms’ wording. It is not uncommon for a no-interest loan to stipulate that if even one payment is late or missed, the loan would then switch to interest-based.
- Know Your Limits
Paying no interest is enough to save hundreds if not thousands of dollars for a loan. But this does not mean you should rush into it if you can not afford it.
The no-interest rate will almost certainly have a time limit, and if you can not afford to pay it back in time, you may end up paying more money than just taking out a regular loan with a standard interest rate.
Where Can You Get A No Interest Loan?
It is pretty safe to say that most banks or credit unions will not be entering into the world of no-interest loans, so there is no reason to look there for one. For the most part, no interest is an agreement made between a retailer selling an item or items and a customer making the purchase.
Although not always the case, no-interest loans are often a promotional tactic used to drive up sales. Here is a list of where you will most commonly find no interest loans:
- Furniture Stores
Buying furniture can get pretty expensive pretty quickly, so to help make sales, furniture stores will often offer promotional periods of no interest. Most people don’t have furniture accounted for in their budget and often use the same furniture for years. Furniture stores know this and use no-interest loans to help ease the burden of buying new furniture and drive up sales.
- Auto Dealers
Car dealerships run all kinds of different promotions to help make some more sales or at least get people down into the shop to look into making a purchase. Taking out a car loan is a reasonably large responsibility and a debt that will take years to repay, so a car dealership will need to develop ways to help soothe a customer’s anxieties to make a sale.
A no-interest loan is just one of the more common tactics used to help, although they often come at the expense of other loan terms. Sometimes a no-interest loan could mean higher monthly payments, higher fees, or even the loss of manufacturer’s rebate offers.
- Electronic Stores
Similar to buying furniture, most people will use their electronics until they break. It can be challenging to justify buying a new T.V. when the one that you own already works perfectly fine. Electronic stores know this, so they offer appealing deals like no interest to help get customers to reconsider and browse the new stock in hopes of making a sale.
- Medical Providers
Some lenders will offer no-interest loans and programs to help their borrowers with medical expenses. With the state of the healthcare system in constant flux, lots of people are just unable to repay their medical debts, so more and more programs are being designed to help them.
- Non Profit Organizations
Anyone in need of temporary or emergency financial assistance could find themselves qualified for special loan conditions from various non-profit organizations.
There will often come a list of specific details the loan can be used for, such as elderly home healthcare or children with special needs. The terms and conditions will vary depending on the organization and specific details of the situation.
Hearing the phrase no interest loan should definitely get someone’s attention, especially if they are looking to make a new purchase. However, it is important to look at the fine print details and know exactly what you are signing up for. Sometimes the details can make a loan more expensive in the long run.
Borrowing money by taking out loans can be a big headache and turn people away from making purchases. As a result, no-interest loans have been created to alleviate some of a potential customer’s financial concerns.
Although saving money upfront with no interest can be quite an appealing draw, there could be some huge financial downsides on the deal’s back end. As with everything in finances, it is important to read the fine print. If a deal sounds too good to be true, then it probably is, so always read all the details before signing anything.
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