The words ‘interest-free credit’ usually put me on my guard immediately. Many of these deals come with enormous, scary hidden catches; and anyway, in a perfect world, we’d all live within our means and never spend money we didn’t have. Unfortunately, that’s not always how it works. Genuinely interest-free loan deals do exist – and when you really need to access extra cash, they can be an economical and useful financial tool. They can also help you get your finances back under control, by chopping the amount of interest you’re already paying on debts.
Three questions to ask yourself
How much do you need? Do you really need to borrow? If you do, honestly appraise how much and try and keep it to a minimum.
Do you actually need cash? Or are you buying something specific that could be paid for on plastic? Sometimes you’ll need to check to find out, eg, some car dealers will allow you to pay on plastic, others won’t.
How long do you need to borrow for? What’s realistic? This technique is primarily for borrowing for less than a year, though it can be stretched. Truthfully establish how long you’ll need the cash for. Will you really be able to pay it back in six months?
Simply buy it at 0%
Get a credit card with an introductory 0% rate for ‘purchases’ and buy what you need on it:
Who’s it for? Those with a decent credit history whose spending can be done on a credit card
Maximum length of borrowing? 21 months (can be extended if you play)
How much can you borrow? Up to your credit limit, £5,000 is around standard
How to do it
Apply for a new credit card which offers 0% interest on new purchases (do ensure it’s on purchases not just balance transfers). You can get up to 21 months at 0%. Assuming you’re accepted, you’ll be given a credit limit (the maximum amount you can borrow) depending on your credit history and income. If this isn’t high enough, there’s nothing stopping you applying for another card elsewhere and using them in conjunction – though don’t apply for lots as that will damage your credit score. Now simply make the purchase(s) on the card, and make the repayments within the 0% period. You need to pay at least the card’s fixed minimum repayment each month (usually around 2% of the outstanding balance), yet to clear the card over the 0% period you need to repay more than that. If there’s a problem and you can’t repay in time, then shift your debt to a cheap balance transfer offer before the end of the 0% period otherwise the rate will shoot up to 15% – 20%.
Use a 0% overdraft
Shift to a bank account with an introductory 0% overdraft and use that:
Who’s it for? Those who rarely use their overdraft, and are looking to borrow low amounts for a short period
Maximum length of borrowing? 12 months
How much can you borrow? Up to £5,000 depending on income & credit history
How to do it
The Nationwide FlexDirect account offers new current account customers a 0% overdraft for the first year of holding the account, after which the charge on the overdraft is 50p per day.
Of course, if you already have an overdraft you can’t use it for new borrowing (though it will cut the cost as you can shift it). Simply set up the account and use the money for whatever you need – but make sure you’ve paid back before the 0% ends.
Flexible loans allow you to borrow money like a normal loan, but repay more quickly and without penalties:
Who’s it for? Anyone who needs a larger cash loan, and wants a simple route
Cost: 5-18% but only for the length of the borrowing
Maximum length of borrowing? 12 months (any longer and you should consider a standard loan)
How much can you borrow? Up to £15,000 depending on credit history
How to do it
The vast majority of loans available are designed with structured repayments over a fixed period. Pay them off early and you could be charged a penalty of up to two months interest. Yet a few firms offer more flexible loans, which you can repay in full whenever you like, without facing any fees. If you’ve a good credit score, Zopa and Ratesetter can be cheaper than high street bank loans. These are peer-to-peer lenders, the idea being that they unite people who want to lend with those who want to borrow. Loan rates vary daily and are determined by the amount needed and length of borrowing. For example, borrowing £7,500 for four years with Zopa can be done at a fixed interest rate of 3.3%. However, a borrowing fee of £90 pushes the APR to 3.8%, and the fee is payable in its entirety whether the loan is repaid early or not. When you want to pay back, simply contact the lender, and ask to repay the loan, in full, with funds from your current account. The advantage of these loans is that there’s no early repayment penalties levied (many bank loans could charge you a month or two’s interest to repay early). An alternative to the above is to consider joining a credit union where short term loans are usually available.