An interest free loan is a debt which you have for a short period of time and on which you pay no interest. An interest free loan for a short term loan commitment can only really be taken out in the form of a credit card or an overdraft on your current account. It can be a useful way of borrowing money short term at no extra cost, if you plan and budget for it correctly.
Most loans charge interest. Personal loans and mortgages all charge an annual rate of interest. Some banks offer interest-free overdrafts up to a set amount, but you need to apply and an arrange this borrowing facility in advance.
The simplest form of interest-free credit is a credit card. This gives you the flexibility to use the interest free loan period whenever you need it. The average length of interest-free borrowing can be anything from just over a month to up to two years. For a traditional credit card, you have around 50 days from the date of purchase before you need to start paying interest on the items you have bought.
Specialist interest free credit cards are available which offer 0% interest for 12 to 24 months. These cards are generally used by people who have an existing credit card debt and who want some time to repay it. The credit card provider will charge you a fee for moving your existing balance across to the 0% credit card.
If you're looking for long term and low interest credit, then a personal loan could be the right option. But if you want short term interest free loans, then a credit card or free overdraft facility is probably the only option that will be viable.
You can get an interest free loan period by using a credit card to buy goods or services, or by using the overdraft facility with your bank. However, 0% interest personal loans don't really exist, as personal and secured loans always have interest included in the repayments.
Loans can be used for big purchases or projects, as interest rates are generally quite low for borrowing amounts between £3,000 and £10,000. They are better suited for long term cash borrowing at a low rate. However, they are not as flexible as other forms of borrowing like credit cards, for example.
So it's quite common for people to take out a loan to buy a new car, or renovate their kitchen. However, if you need a few hundred pounds quickly, then borrowing on your credit card or your current account overdraft facility is a quicker and simpler way of borrowing short-term money.
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If you want to borrow interest free, then there are a number of possible methods to benefit from an interest free loan.
The first way to get a short term loan on a credit card is by using its 'interest free period'. Generally, most credit cards will let you make purchases with no extra interest, as long as you repay the money in full within 51 to 56 days.
Each credit card will specify the length of this period, but it's generally around 50 days or so. This is very likely to be the case even if you have no special offers, such as a 0% purchases deal on your credit card.
This option is best if you have a low or poor credit history. This is because you may still be able to apply for a bad credit credit card, and utilise the interest free period. However, your credit limit will be much lower in order to minimise the risk.
Just be sure to have a Direct Debit set up to repay the entire balance in full before the money is due.
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If you want a short term loan without interest that lasts a little longer in order to buy something online or from a shop, then a 0% purchases credit card is the best option.
These credit cards can essentially offer you a 6 month or 12 month interest free loan, or sometimes, even longer, depending on the deal and how good your credit score is.
The idea with a 0% purchases credit card is that your balance will not accumulate any interest on it during the interest free period. It's best used to make one or two big purchases when you first get the credit card, and pay it off in instalments, spread out over the course of the interest free period. Make sure you have a plan for paying off the borrowing, otherwise you could get into debt problems.
For example, if you want to buy an annual train season ticket for £5,000, which would be cheaper than renewing your ticket every month, you could put the purchase on your interest free credit card, and repay the debt monthly (which would be like paying for a monthly ticket, only cheaper).
Any type of loan used for purchases should be used responsibly and in a way that benefits your current lifestyle, rather than used for buying things you wouldn't normally be able to afford.
However, if you're struggling with debts and need a short term interest free loan, then read on to learn more about balance transfers.
Find a credit card with an interest free period for purchases.
By using a balance transfer credit card you can transfer your current credit card debts to a 0% repayment plan.
This comes at the cost of paying a transfer fee of around 3%, but this varies depending on the length of the short term 'loan' and your credit rating.
So if you have debts of, say £1,000, you could transfer them over to an interest free balance transfer credit card. You would have to pay a fee, and for this example, it would be £30 (3%). But then you would get up to 12 months to repay the debt.
After the interest free period, your debts will accumulate interest, and at a far higher rate than you were probably paying before. So you need a plan to pay off the loan during the interest free period, or you need to shop around for a new 0% deal. Check what interest rate (known as APR or Annual Percentage Rate) your card will revert to at the end of the interest free period.
Find a balance transfer credit card and stop paying expensive interest payments on your balance.
Money transfer credit cards can be used to repay bank debts such as an overdraft. However, it is an expensive way of borrowing and could land you in greater debt.
Money transfer cards are also known as 'cash advance cards' because they send cash to your bank account which can then be used in a similar way to a loan.
The interest free period is generally shorter than on a loan and there's a fee to pay upfront, usually around 3-5% of the amount you want to transfer.
A money transfer credit card will also revert to a much higher rate of interest after the offer period is over, so make sure you have a plan to repay this in full and on time.
Find a credit card that will let you transfer money into your current account.
Some bank accounts come with an interest-free overdraft buffer of a few hundred pounds, while others offer customers a potentially much larger interest-free overdraft amount - but for a limited period of generally no more than 12 months. If you go past this agreed limit, you will be hit by the full overdraft rate.
Call up your bank or visit a branch to arrange an overdraft, and make sure you fully understand how any interest-free period is and what your limit is.
You will also need to have a good credit rating in order to get a large overdraft facility with your bank.
Compare current accounts from different providers and find a bank that works for you.
You can also consider taking a repayment holiday with a credit card or a loan, which means you can skip a month or two of repayments. This can be useful if you are struggling with your finances and need some breathing space. However, interest will most likely be charged during the repayment holiday period, so you need to think about whether this option will land you in more debt in the long term.
If you are really struggling with your finances you could seek advice from a free debt charity such as StepChange or National Debtline, who can talk to creditors on your behalf and help you clear your debts.
If you are buying something specific, rather than borrowing money generally, you might be able to use a buy-now-pay-later service to effectively borrow the cost of the item interest-free for a short period too. However, this is tied to a specific purchase, rather than a general credit facility. It is also very easy to get into debt this way, as you end up buying items you might not be able to afford at the time. Think carefully about BNPL deals, and make sure you understand what interest rates you will be charged and what you are signing up to.
Credit cards are the most suitable type of loan if you want flexible and short term borrowing, as are arranged or authorised overdrafts.
Other options include payday loans, but the interest rates and late payment fees are extremely high, so should be avoided entirely.
There are potentially other ways to borrow money on a low-cost basis. But very rarely on an interest free basis, and the risks (and potential fees) are quite high if you're not very strict about how you organise your repayments.
Interest rates for personal loans are often much lower than a credit card or an overdraft, but they can vary significantly depending on your credit rating, how much you want to borrow and which provider you use.
Any cash loan lasting for a period shorter than six months is likely to be a payday loan, which you should avoid because the interest rates can quickly rack up. If you are really finding your finances tough, then a debt charity can help you sort out your money and save you from taking on extra debt.
A money transfer credit card or an overdraft from your bank are likely to be far better options for flexible short term borrowing.
If you're worried about not being approved for credit because of a low credit score, then an overdraft with your bank could be helpful. Banks tend to be more helpful to their own customers, and may overlook a low credit rating if you ask for an authorised overdraft.
However, before applying for any new credit, check your credit report and see what your chances are of being approved and see if you have any outstanding debts that can be cleared first to improve your score.