What Is An Interest-Free Loan And Is It Really Interest-Free?

Many online lending platforms claim to offer interest-free loans. While the deal might seem too good, there’s always a catch. If individuals aren’t careful, they may get themselves into overwhelming debt.

An interest-free loan allows the borrower to pay it back with no interest charges. However, they must do so within the set repayment period; otherwise, the lending institution may begin charging them hefty penalty fees. Below is an extensive guide on everything there is to know about what an interest-free loan is.

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What Is An Interest-Free Loan, And How Does It Work?

As its name suggests, an interest-free loan is a loan where the borrower repays the loan with no additional interest charges.

However, with most lenders, individuals have to pay off their loan within the agreed repayment period to benefit from the interest-free offer. If they fail to do so, the lending platform may begin charging them interest. Some lenders may go as far as calculating the interest rates from the day the borrower took the loan.

For instance, an individual takes a $7000 interest-free loan. The lender states that the loan has to be paid back within two months for them to claim the interest-free offer. The borrower does their best to pay off the loan within the agreed repayment period. But, for one reason or another, they cannot pay the last $2000 by the time the period ends.

In this scenario, the lender may charge interest for the entire $7000 and not the remaining $2000. This way, the borrower may pay back way more money than they borrowed. Interest-free loans may also have additional costs, such as application fees and origination or service fees.

Some lending institutions deduct these charges from the original loan, so individuals may be forced to borrow more money to compensate for these fees. This may increase the pressure to repay the loan within the set repayment period.

Factors To Consider Before Taking An Interest-Free Loan

Before applying for an interest-free loan, one critical factor is the lending platform’s terms and conditions.

Most lenders don’t tell borrowers everything they need to know before taking a loan. So, it is recommendable to go through the terms and conditions document carefully. Doing so will enable the borrower to know if there are extra charges and interest rates if they fail to repay the loan on time, among other important information.

Another vital factor to keep in mind is the set repayment period. Doing so will determine whether or not one can afford to pay off the loan within that period.

Better Alternatives To Interest-Free Loans

Considering the pressure and extra charges that come with interest-free loans, it would be best to consider other alternatives. For starters, one can save up if the responsibility they need to take care of can wait.

Saving comes with a myriad of benefits, from cultivating self-discipline to sparing the individual from the trouble of paying back a loan, to name a few. What’s more, if a person saves their money in a high-yield savings account, they can earn interest which increases the money they saved.

Borrowing from close friends and family is also a great alternative since an individual won’t have to pay back the money with interest. They can also agree on flexible repayment terms, saving the borrower from unnecessary pressure.

Another good alternative is taking a consumer loan from a bank. While banks still charge interest rates from the get-go, it won’t be as expensive as interest-free loans are over time. What’s more, personal loans from banks have more flexible repayment periods, allowing the borrower to pay back their loan at their own pace.

Credit card companies also offer credit cards at a 0% Annual Percentage Rate (APR.) However, like interest-free loans, the individual can only benefit from this offer if they manage to pay off their credit card debt within the set repayment period.

Conclusion

Interest-free loans have allowed individuals to purchase items or take loans with no interest charges. However, the borrower must pay back the loan within the agreed repayment period. If they are unable to, they may pay back the lender way more money than they initially borrowed.

In simple terms, interest-free loans offer a ton of benefits only if the borrower abides by the lender’s rules.