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Interest-Free Loans: Are They Really Interest-Free?

There are plenty of finance deals available in the market but there are offers that are more attractive than others. Interest-free loans, for example. Can you really take out a $25,000 loan without any interest? Quite a great deal, isn’t it? Do you know what they’re saying if anything seems too good to be true? Despite this, interest-free lending continues to create immense interest among consumers, enticing them to apply and take out these loan products.

StepUp Personal Loan. Interest Loans? What Are Interest-Free Loans?

An interest-free loan does just what its name says. The loan is not subjected to any interest rate, therefore, no interest will be charged. Do you really believe, though, that the lender would grant you a loan without any profit for themselves? 

Loan With No Interest

Personal Loans. Low Interest? So How Are Charges Generated?

You’ll find two types of this type of loan in the market:

  • Personal loan (which are good alternatives to payday loans)  without any interest until the last repayment
  • Personal loan with no interest for a specific period, like 12 months, for example, before any interest rates are applied.

Get Personal Loans No Interest Up To The Last Payment. Nab Loan

It can sound enticing to get an interest-free loan, but you may be asked to pay a monthly “Merchant Fee” or “Service Fee,” with the loan payments, instead of regular interest charges. Typically, this would be a percentage of the outstanding balance or even a set amount, as the minimum credit card payment would be computed. So although you do not pay interest, the charges you paid normally would make the debt even more costly than it would be if you got a traditional loan with interests and fees built-in, so that you know precisely what you’re supposed to pay.

The table below illustrates the difference between what you will pay for a non-interest loan versus a normal personal loan.

Why Is An Interest Free Loan More Expensive Than A Regular Loan? Low Interest? 

  Regular Loan Lend Bubble
Loan Amount $25,000 $25,000
Loan Period 5 years 5 years
Interest Rate 0.00% 9.95%
Comparison Rate 0.00% 11.70%
Fees and Charges 20% of the outstanding balance Establishment fee: up to $395
  calculated on an annual basis Administration fee: $13/month
Weekly Repayent $165.59 $126.99
Total Amount to Repay $43,053 $33,017
     
SAVING: $10,036  

 

As you’ll see in the estimates interest, there’s a major financial drawback if you took out an interest-free loan which, for a loan with a 5-year term in Australia, may cost more than $10,000.

Get No Interest For A Fixed Time. Loan

Personal loans with no interest features for a specific period may seem like an attractive deal, but when you consider these loan, you have to keep some things in mind:

  • The loan provider is not expecting you not to pay back the money you owe during the interest-free period, just like some credit card companies will not charge your purchases any interest for a certain time.
  • Some charges apply once the interest-free period is over and will likely be higher than what you can get from a traditional loan provider. It means the repayments will be higher than what you will be paying if you took out a regular loan. What this means is that an interest-free loan that seems affordable at first may become unaffordable because the repayments are not balanced to allow you to have fixed repayments during the entire loan term.
  • Please be aware that with the higher interest rate you would typically pay at least the same amount, and possibly higher, than if you’ve had a conventional personal loan taken out.
  • A creditor may provide an interest-free loan for a certain time, but may also charge you a hefty fee for early repayments of your loan. This means you’re committed to paying a loan with a higher interest rate or be charged with a big pre-termination fee.

As you can see, in order to keep your loan interest free, you will have to make around four weekly payments when you take out a non-traditional loan. Ultimately, let us consider what you are going to repay if you pay the interest-free loan minimum payment only. For easy analysis, we assumed that during the non-interest period you would clear $6,000 of the balance by making weekly payments of $115.38. 

Although you’re not going to spend as much as you can on an interest-free loan when you only pay the fee, you still lose $300, as well as charges in comparison to what you’ll pay on a regular loan. In the illustration above, we also applied what is considered a highly competitive rate – our highest interest rate at Lend Bubble – and interest-free borrowing agreements at that particular rate might not always be possible. 

Interest Free Loans

What Are The Benefits Of Taking Out An Interest-Free Loan?

You can borrow at reasonably low interest rates/annual fee if you have income for paying off a personal loan free of interest in a limited period of time. However, at the same time, if you have about $2,000 left each month after all your other outgoings, you’re likely not in a position to save much to make a major purchase. It’s pertinent to analyze whether it’s a good choice for you. Also, you could borrow a substantial amount of money at an excellent rate if you have some discretionary income and also have a clean history of credit. 

Generally, zero-interest loan support are recommended if you’re planning to make a small purchase and are able to commit to a fixed repayment amount that you can pay off the balance before the interest charges start. This is the same concept that interest free credit card offers are used; they are good as long as you can promise that the balance is zero by the end of the no-interest period.

Look At The Actual Cost Of An Interest-Free Borrowing

An interest-free loan will seem enticing, but the free interest typically hides the real and complete cost of the loan. Don’t make a decision based simply on estimates or just looking at the interest rate of the loan – or in this case, a loan that has zero interest. Look at the full cost of your loan before deciding to sign any loan agreement.