Are you buying a car? A computer? Or maybe furniture? If so, you've probably seen ads for interest-free loans. Such a loan allows you to make a big purchase right away and pay it off, without interest over time. However, you might wonder whether this is all there is to it? These zero interest personal loans are designed to get people interested in major purchases, but they can be expensive if you don't pay back what you borrowed within the time frame you agreed to.

That doesn't mean you shouldn't take advantage of a no-interest loan. But you should know what you're getting into before you borrow. Keep reading below to learn more about 0% interest loans, how they work, and whether they're worth taking.

someone is writing on a computer, next to it is a symbolic 0% loan

What is an interest-free loan?

No-interest loan has a 0% increase of base price—but only for a limited time. From six months to several years, the interest rate on this type of loan is usually 0%. But of course there is a catch. After this promotional period ends, the balance of the loans with no interest must be repaid at a much higher interest rate.

For instance, you can have 0-percent financing for 72 months, and after that 19% of every installment. You can pay more than the core price of the good, but you can also try to buy some items you couldn’t have afforded in the first place. Some mortgage credits work similarly - you can read more about it in our guide to buying a house.

How does a no-interest loan work?

Let's say you want to buy a new electric car for $50,000—and you can buy it based on zero-interest personal loans for 12 months if you qualify. In theory… it's great, right? It seems great, but it's not always such a good deal. People on average buy a car on installments for 72 months—that is, if you can't pay off the car for a year, for the next five years you will be paying higher installments than you’d pay otherwise. Sometimes it's better to put money aside for a year and buy an electric car with cash!

Salesmen at dealerships often use no-interest loans to get people to buy a model that didn't sell well, or to make room for new products in the warehouse—but these are typical marketing tactics. If you’re hearing about a personal loan with no interest, it’s a good idea to learn more about the product.

It's also worth noting that most offers with 0% financing for 72 months or less are only available on cars or other goods sold at full price. This means you can't take advantage of sales, and you can't get a bargain. Try looking for more discounts and bargains and haggle with the dealer.

0% loans make sense for purchases of goods at a slightly smaller value—for example, if you want to buy a new MacBook, you can easily get 0% interest up to the value of $5,000 for 24 months. For most people, it’s not impossible to pay off all the installments in a few months, so that you can avoid increasing installments. A good strategy in this case is often to have half the price of the goods ready and pay it off as the first payment.

hand holds 0%

What do I need to get an interest-free loan?

What's more, you'll need a very high credit score to qualify for zero interest personal loans. Depending on the store and bank, the exact range will vary, but this type of personal loan with no interest is typically not given to people who have not proven that they can pay back their debts. This means that people, who have never bought anything on installment before, may not be able to repay a no-interest loan.

Is it possible to get loans with no interest?

In most cases, it's a good idea to take an interest-free loan if you're sure you can pay it back within the promotional period. But recent years have proven that late payments are not always your fault. People lost their jobs during the pandemic period or because of the recession, so a delay could often occur… and then you're paying installments much higher than normal.

At first glance, 0% financing may seem like a great bargain. In reality, however, it is still a debt. Even if you don't have to pay interest at the beginning, you later have to commit to paying it back. When you sign up for 0% financing, you agree to pay for something you can't afford.

If a vendor offers you a 0% loan, think carefully about the offer. Remember that a loan with no interest can be a good choice, but only if you are sure you can manage to pay it back before you have to pay interest.

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