How to borrow money interest-free

Do interest-free loans exist? Not exactly. They aren’t available through lenders, although you may be able to get one from the government. But lenders offer other types of credit that make it possible to borrow without paying interest.

Learn more about interest-free loans and discover your options below.

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Is it possible to get interest-free loans?

Not from lenders. There are many different types of loans but they all charge interest. Some lenders may offer a 0% promotional period on a loan, meaning you won’t pay interest for a set number of months. But you’ll always end up paying interest before your loan is paid off.

However, lenders do offer other types of interest-free credit. And if you’re set on getting a loan, you may be able to get a low interest rate. More on this later.

For those on a low income, you may be able to get an interest-free loan through the government or the No-Interest Loan Scheme.

Can I get an interest-free loan from the government?

You may be able to get a Budgeting Loan from the government to pay for essential items such as rent, clothes or travel. To be eligible for one of these interest-free loans you must have been getting one or more of the following benefits for the past six months:

  • Income Support
  • Income-based Jobseeker’s Allowance
  • Income-related Employment and Support Allowance
  • Pension Credit

With these loans you only have to pay back the amount you borrow – there’s no interest to pay. The repayments are taken automatically from your benefits.

You can’t get a Budgeting Loan if you’re on Universal Credit. But you may be able to apply for a Budgeting Advance, which is similar.

What is the No-Interest Loan Scheme?

The No-Interest Loan Scheme is backed by the government and run by credit unions and lenders. It offers interest-free loans between £100 and £2,000 that last for six to 18 months. You may be able to get a loan through the scheme if you:

  • have been refused credit by a lender
  • urgently need money for essentials, such as basic household items or school uniforms
  • live in an eligible area of the UK

You’ll need to be referred through a housing association, credit union, or a lender that has agreed to work with the scheme.

What types of credit are interest-free?

Lenders don’t offer interest-free loans, but other types of interest-free credit are available. Below are four options you could consider.

0% credit cards

Both credit cards and loans may have interest-free periods, but there’s an important difference. Credit cards allow you to pay off your debt before the 0% period ends. This means they can be truly interest-free.

Common types of 0% cards include:

  • Purchase cards. These cards can help you spread the cost of a big purchase such as a sofa or laptop.
  • Balance transfer cards. If you’re paying interest on your credit card debt, you may be able to save money by moving your debt to a balance transfer card which has a 0% interest period.
  • Money transfer cards. These are similar to balance transfer cards except they let you move debt from your bank account to the card instead of moving debt from another card.

To ensure your card stays interest-free you’ll need to meet the minimum monthly payments, stay under your credit limit, and pay off your debt before the 0% period ends. Once this period ends, you’ll usually be put on the lender’s standard interest rate.

You normally need a good credit score to be accepted for an interest-free card. Check your free Experian Credit Score anytime you like. Need to give your score a boost? Find ways to improve your score.

Interest-free overdrafts

An arranged overdraft lets you borrow money through your bank account. Some banks offer an interest-free ‘buffer’ meaning you won’t pay interest on money borrowed up to a certain amount.

Your interest-free buffer may have a time limit. If so, your bank will start charging interest when the 0% period ends, unless you’ve already paid back the debt. Like credit cards, an overdraft can be paid off at any time so you won’t be charged an early repayment fee like you normally would with a loan.

Buy Now Pay Later

Many retailers offer interest-free, short-term loans to help you spread the cost of a purchase. But be careful – if you miss payments or break the terms of the agreement, the charges could be high and your debt could grow quickly.

It’s important to know that Buy Now Pay Later credit is usually provided by a separate lender, not the retailer you’re buying from. Because these types of credit agreements tend to last less than 12 months, it’s unlikely you’ll have full consumer protection if something goes wrong (such as the lender going bust).

PayPal Credit

PayPal is an online payment platform. You can apply for short-term, interest-free credit on PayPal purchases over a certain amount.

If you make PayPal Credit purchases on different days, each purchase will reach the end of its interest-free period on a different day. It’s important to keep track and pay them off before the end date, or you’ll pay a hefty interest rate. Also, only buy what you can comfortably afford.

When is a low-interest loan a better idea than an interest-free option?

Although lenders don’t offer interest-free loans, you may still prefer loans over the interest-free alternatives. For example, loans are often more suitable if you want to borrow a larger amount over a longer term. And some people like the predictable monthly payments. If you think that this option is for your compare and learn more about low-interest loans with Experian.

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We’re a credit broker not a lender