Guide to interest free loans

What is an interest-free loan?

There’s no such thing as an interest-free personal loan. You’ll get charged interest on all loans, so you’ll always pay back more than you originally borrowed.

But you can get a loan that charges low interest. This can be more affordable than borrowing on a credit card, for example, which typically charges a higher interest rate (once any introductory offer has ended).

How does interest on a loan work?

When you take out a loan, the lender will charge you to borrow the money. The total amount you pay back will depend on the rate of interest charged by the lender and the term (length) of the loan, as well as any fees.

Most personal loans have a fixed interest rate, rather than a variable rate. This means your monthly payments will stay the same over the life of the loan.

The figure you need to look for is the Annual Percentage Rate (APR). It’s shown as a percentage of the amount you’re lending. You’ll be charged this every month for borrowing the money, on top of your repayments.

The APR makes it easy to compare loans like for like. They can vary hugely, so it makes sense to shop around.

You may find that interest rates are lower if you’re borrowing a larger amount, but you should only borrow as much as you really need and can comfortably afford.

Also, it’s important to note that if the APR quoted is ‘representative’, it won’t necessarily be the rate you’ll receive.

It’s the rate that at least 51% of applicants will be given, typically those with the best credit rating.

The actual rate you’ll be offered - your personal APR - may be higher than this. It will depend on your personal circumstances and credit rating.

How long should I get a loan for?

Although paying off your loan over a longer period can mean smaller monthly payments, the longer you take to repay your loan, the more interest you’ll have to pay overall.

Aim to pay off a loan in the shortest amount of time you can afford.

How does my credit score affect my loan interest rate?

Your credit score is a figure that reflects your financial credit history allowing lenders to gauge how likely you are to repay the money you’ve borrowed on time.

A high credit score shows lenders that you’re financially reliable.

Therefore, you’re more likely to be accepted when you apply for a loan and have access to the best interest rates, too.

If you have a low credit score, you’re considered more of a risk. So lenders will mitigate this risk by charging a higher APR, if they’re prepared to lend you money at all.

Tips on how to get a low interest rate

• Compare multiple deals and interest rates from different lenders to make sure you’re getting the best deal
• Check your credit score before you apply for a loan. Look for any errors in your credit report and if your score is lower than expected, consider getting onto the electoral register or using a credit card responsibly to help build it up
• Avoid applying for multiple loans within a short space of time. A ‘hard’ search is performed on your credit report for each application. Lenders might see multiple applications as a sign that you’re financially struggling and refuse to lend to you. Instead, run an eligibility check before you apply for any type of credit. This only requires a ‘soft’ credit search, which won’t affect your credit score, and shows how likely you are to be accepted for a loan
• Consider looking at other ways of borrowing, such as using a 0% credit card

Can you get interest free loans?

No, all personal loans charge interest.

But there are a few short-term methods of borrowing for smaller amounts which won’t charge interest:

Interest-free overdraft

You could ask your bank for an interest-free overdraft, or to extend an interest-free overdraft you already have. If you have an overdraft that charges interest, you’ll want to avoid using it as they can be expensive.

0% credit cards

An introductory 0% APR means you can ‘borrow for free’ for a set period. Just make sure that you can make your monthly repayments and pay back the debt in full before the promotional offer ends. After this, you’ll begin to pay interest, which could be costly.

0% balance transfer credit card

Allows you to move existing debt from one or more credit cards onto a new one that charges you zero interest for a promotional period of time - from six months up to around 31 months, depending on the card.

You could avoid paying hundreds of pounds in interest this way. You usually have to pay a balance transfer fee (a percentage of the amount you’re transferring) and the maximum amount you can transfer can’t normally exceed 95% of your credit limit. After the introductory 0% period ends, the card’s standard interest rate will apply.