Should you get an interest-free loan? – Forbes Advisor

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Have you ever seen those “0% APR” loan advertisements! or “free funding!”

If this triggered your internal skeptical radar, then with good reason. Often these statements are not quite what they sound at first glance. But if you know what to look out for, you can still use these interest free loans as a way to save money and afford certain things sooner.

What is an interest free loan?

Interest-free loans are exactly what they are like: loans without interest. It is important to know that this does not necessarily mean that the loan is free. There are three main ways advertisers sell interest-free loans, but somehow make you pay.

First, deferred interest loans are common and will only charge interest if you do not pay off the entire loan in full by the end of the promotion period. If you do not repay the loan in full before the expiration of this period, you will generally be required to pay retroactive interest.

Secondly, the interest-free portion can also be applied only for a certain period of time, and not for the entire loan. This is more common with 0% annual interest rate (APR) credit cards, which usually offer interest-free financing for a year or two before switching to interest.

Finally, interest-free loans may still charge other fees such as clearance fees, application fee or prepayment fees… Lenders can deduct these fees from your loan amount, which means that you will need to borrow a large amount to compensate. These tricks are not always explained in advance, but they should be shown in small print on any documents you sign.

Are there interest-free loans?

Interest-free loans exist, but they tend to be more common for expensive goods and services, including:

  • Expensive consumer goods: You can often find 0% loans or credit cards in stores selling high-priced goods such as electronics, jewelry, or furniture. Most of them are deferred interest offers, which are not true interest-free loans unless you pay them back before the end of the promotion period.
  • Cars: Car dealerships sometimes offer interest-free loans during the summer months to make way for new models or get rid of less-sold vehicles.
  • Medical or dental procedures: Doctors and dentists usually offer loans at 0%. These medical loans generally more common for routine procedures that are not covered by insurance, such as plastic surgery, LASIK, or cosmetic dentistry.

Is it worth getting an interest-free loan?

There is no definite answer to the question of whether it is worth taking an interest-free loan. It depends on your unique situation and goals.

One thing that you should definitely consider when considering interest-free loans is the fine print. As we mentioned above, interest-free loans are rarely truly free. Usually, you need to fulfill certain conditions in order to receive an interest rate of 0%, or it may only last for a certain period of time. There may be other ways the lender charges a commission – which is technically not interest – so it might even be more expensive than a regular loan.

Here are a few questions to ask yourself when deciding whether to get an interest-free loan:

  • I understand how credit works? You need to understand exactly how the zero percent offer works, or you may spend more than you bargained for.
  • Am I eligible to receive free interest? Some interest-free loans require you to meet certain requirements, such as meeting all of your requirements. payments on time or repay the loan before the end of the promotion period. If you are unable to meet the requirements of your particular loan, an interest-free loan is probably not right for you.
  • Do I need to make this purchase right now? Almost always better copy first buy something in cash if possible. This way you won’t need any loans at all and you will receive interest while you save. But if you absolutely cannot wait, an interest-free loan may be a good option.
  • Can I limit myself to buying only what I need? Some interest-free loans are actually deferred interest credit cards, and many people are tempted to use them at high costs. Interest-free loans are a smart choice only if you can limit yourself to buying only what you need and that’s it.

Pros of interest-free loans

  • The opportunity to save: A properly paid interest-free loan can save you a lot of money.
  • Can Afford Things Before: Saving up for expensive purchases like LASIK can be time consuming, and by the time you can afford it, you may still need reading glasses. Interest-free loans allow you to take advantage of the procedure when it is most important.

Cons of interest-free loans

  • A good credit rating may be required: Usually you will need good credit (minimum 670) for a 0% loan.
  • Limited to specific products: Companies often use interest-free loans as a way to sell high-value goods to people who might not otherwise be able to afford them. It is unlikely that you will be able to find an interest-free loan, for example, to buy groceries or a book.
  • Maybe not as free as it sounds: Advertisers often use flashy ads to make you think the loan is free. But you will often find other fees in small print, which mean you have to pay in one way or another.
  • Current requirements may need to be met: Often times, if you do not pay off your interest-free loan by a certain date, or if you are late in payment, you will be charged interest.

Alternatives to interest-free loans

If you need to buy something, interest-free loans are not your only option. Also consider these alternatives:

  • Save up. If you can wait, it’s almost always best to save first. This way you can avoid getting a loan altogether. In addition, if you save in high yield savings account, you can earn a good amount of interest instead of paying the lender.
  • Credit card with 0% annual interest rate. These Credit cards with 0% annual interest rate We offer an interest-free advertising period. But, unlike deferred interest cards, they will not penalize you with late interest unless they are paid in full by the end of the promotion period. However, the unpaid balance at the end of the promotional period will begin to accrue interest in the future.
  • Take care of your friends or family. This is difficult because you don’t want to hurt your relationship. But if you are confident that you can get your money back and are willing to sign a contract to get it done, borrowing from friends or family who are in better financial position may be an option.
  • Apply for a grant or loan based on your need. There are many non-profit organizations that offer grants or interest-free loans based on the needs of certain groups of people, such as veterans or members of religious groups. You can also use 211.org to find social support services in your area that can offer these features.

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