Are Interest Free Loans Really Interest Free?

summary:

“…An interest-free loan is a loan where the borrower does not have to pay interest for a particular period of time…”

“…Yet, when you look at actual “0%” loans they usually have some catches:

  • Hidden Service Charge” or “Merchant Fee” that cost more than interest fees.
  • When the borrower “defaults” (misses a payment) the bank accrues interest to the remainder of your loan.

“…In general, interest-free loans are only going to be useful if you want to make a small purchase and you can stick to a set repayment amount to ensure you repay the loan before interest kicks in…”

“…If you have a substantial and reliable source of income, that allows you to pay off an interest-free personal loan in a short time frame then you may have the opportunity to borrow at a relatively cheap price…”

Interest-free loans are among the most attractive financial deals offered in South Africa by various credit providers. But are these loans really interest-free? or is it too good to be true? Who wouldn’t be interested in acquiring an interest-free loan – the answer is – no one. However, terms and conditions always apply and lenders wouldn’t just hand out money without getting anything in return.

So then what exactly is an interest-free loan? and how does it work?

An interest-free loan is a loan where the borrower does not have to pay interest for a particular period of time. However, this is not as good as it sounds. A “true” 0% loan is a losing proposition for the bank. Yet, when you look at actual “0%” loans they usually have some catches:

Personal Loans that are Interest-Free Until your Final Repayment

Loans that are 100% interest-free may seem appealing, but instead of paying interest you’ll spend money on a monthly “Service Charge” or “Merchant Fee” along with your monthly loan repayment. This is usually a percentage of your loans total balance or a fixed amount ( calculated in the same way a minimum payment for a credit card would be ) So, while you don’t pay any interest fees, the fees you pay to “make up”  the loan are far more expensive than if you took out a traditional personal loan.

Interest-Free for a Fixed Period

The 0%  interest is only applicable for a certain time frame, and after that, the interest rates jump. They make money when you don’t (or can’t) pay off the loan during the 0% period. The interest will accrue at some rate but only if or when the borrower “defaults” (misses a payment). The bank then gets to add on all of the accrued interest to the remainder of your loan.

And while fixed period interest-free loans do appear to be offering you a better deal, there are a few things you need to be mindful of when considering these loans:

And while fixed period interest-free loans do appear to be offering you a better deal, there are a few things you need to be mindful of when considering these loans:

– The lender is banking on you not repaying the loan within the interest-free period.

– When interest rate kicks in after your interest-free period, that interest fee is likely to be higher than the interest on an equivalent personal loan from elsewhere. Meaning your regular repayment could be much higher than usual.  (A loan that is affordable during its interest-free period could quickly become unaffordable if your repayments aren’t balanced to give you a fixed repayment amount over the full length of the loan term.)

– A lender may offer an interest-free period, but will also penalise you heavily for repaying your loan early, so you are locked into paying it off at a higher interest rate or paying a hefty early termination charge.

So Does Anyone Really Benefit From an Interest-Free Loan? If so how do they benefit?

In general, interest-free loans are only going to be useful if you want to make a small purchase and you can stick to a set repayment amount to ensure you repay the loan before interest kicks in. The same principle as using interest-free credit card deals; they’re fantastic so long as you can commit to ensuring the balance is zero before the end of the interest-free period.

If you have a substantial and reliable source of income, that allows you to pay off an interest-free personal loan in a short time frame then you may have the opportunity to borrow at a relatively cheap price.

Interest-free loan deals may seem enticing, but the interest-free message will usually be masking the true and full cost of the loan. Don’t be fooled in making a decision based purely on the interest rate, look at the regular repayment figure and the full cost of your loan, as well as the charges and fees schedule, to see what the full cost of the loan actually is.

Are you still unsure about an interest free loan? Do you still need a loan but have bad credit? Are you unsure on how to go about getting money for things you want most? Contact us to day and we will help you get a tailor made loan suitable for both you and your wallet.