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Last updated on 18th of December 2019

Everything you need to know about 0% loans

Most of the loans we all see in our day to day live are not 0% interest. This is because most lenders have a very simple business: they lend money, they charge interest on money lent, and their profit is the interest minus costs (as marketing or defaults).

Do 0% loans really exist?

It is still is possible to get a 0% interest loan in the UK, but first it’s important to understand what that really means. A 0% loan is most likely not a ‘free’ loan. In most cases there will be other terms attached. So like any financial product, it’s necessary to understand all the terms, why someone would offer an interest free loan, and what to be aware of in general.

It’s possible to get an interest-free loan that has charges elsewhere in the product. Some companies who want to sell products, like cars and tv companies, will offer a 0% loan if you buy their product. Credit card companies may offer 0% interest for a limited time. In all of these cases, the loan is not free and you shouldn’t expect it to be. There will be charges elsewhere, even if you aren’t paying interest.

That doesn’t mean these loans can’t be useful. By removing interest charges, lenders can make it easier for people to understand the real charge. This is because interest rates can be confusing for many, and APR can be even more confusing, especially for shorter dated loans.

It’s hard to separate the concept of interest with a loan, but the easiest way is to think about interest as just one way to show the real price of the loan, not the only way.

0% balance transfer cards

0% balance transfer cards are available online throughout the UK. They are often used to consolidate different loans onto one single balance. Credit card companies offer a 0% transfer to encourage people to switch to them. These loans have 0 interest for a fixed amount of time, usually a few years.

If you are able to pay off all of your credit card debt before the 0% offer expires, these loans can be a great option. You can reduce your interest payments by moving debt to the new 0% transfer card. These loans can also be considered a type of consolidation loan. If you take one of these offers and pay off your credit responsibly, you should also see your credit score go up.

0% balance transfer cards often have a one time transfer fee. Make sure you understand how much that total charge will be. If it’s less than the interest you will save by going to 0%, then a 0% balance transfer card could be a good idea. If the 0% transfer fee is high, and your current borrowing rate is low, then it might not make sense to take up one of these loans.

Because the 0% borrowing charge only lasts for a fixed time, make sure you have a good idea when you will be able to pay off your debt. If you don’t think you will be able to pay what you borrow back in time, make sure you understand the interest rate that your loan will switch to. If it’s higher than your current rate, then take this and the transfer fee into account before you make a decision.

0% balance transfer cards are not always the best decision, after considering the transfer fee and the rate that it steps up to over time.

0% purchase loans

Many retailers will offer 0 interest loans as a way to encourage you to buy their product. Car ads offering interest free loans are a good example. They will offer to sell you the car at retail price, and lend you the money to buy it. You pay it back over time.

Car companies are able to offer 0% interest, because they make a markup on the car that they sell. TV sellers do the same as do many other popular high ticket items. Since the sellers are making a good enough profit margin on their product, they can offer loans without interest to enable more sales.

While it might seem that there is no charge to these loans, there really is. While the car seller is offering an interest free loan to finance the car, they will probably offer a cheaper price to someone paying up front. This shows that the final price of the two cars is different. Since the cash buyer got a ‘discount’, the car getting a 0% loan is more expensive. The difference between the two real prices is the true cost of the loan.

One handy thing about 0% finance loans is that understanding repayments is easier. Since you are borrowing a fixed amount over time, and there is no interest, you can easily understand your monthly charges. This makes planning and budgeting easier.

Interest vs fees

Some lenders may charge a fixed fee instead of an interest rate. Depending on how this fixed fee is explained, this could be either good or bad. Overdraft charges used to be a fixed for for every few pounds you borrowed. That is confusing enough, but since people are never sure how much they have borrowed on overdraft, that makes understanding charges even harder.

The FCA has recently prescribed that banks stop the practice of fixed fee per amount lending in favour of a more standard interest rate.

Other lenders, generally newer ones, may offer a fixed fee for access to credit. By paying a fixed monthly fee, their customers can borrow money with no interest. By removing confusing interest charges, this makes it much easier for customers to understand how much they owe and how much the credit will cost them. This can help people stay in control of their finances if they don’t like the confusion around interest rates.

When a lender offers borrowing at 0%, but still charges a fee, the cost of the loan is the related charges. It’s important to understand the total charges and compare those to what you think you would pay with a normal interest bearing loan. If the charges are higher on the fixed fee loan, then it’s better to stick with what you have.

Some people also prefer the assurance that fixed fee borrowing providers. Knowing they will never pay more than a fixed amount can put their mind at ease. They don’t need to worry as much that they are on the clock when a loan is outstanding. This acts similar to an informal insurance or backup plan, so these benefits should also be taken into account when evaluating a loan that charges a fee to lend at 0% interest.

Lower interest, but higher price

While not related to 0% loans, some lenders who offer financing for products will display a rate that would imply the true cost is lower than it is. This has been known to happen with companies that lend to people with bad credit. There will be something they are selling, like a washing machine, along with an interest rate. Borrowers need to be extra careful to read all the details in these situations.

If you have bad credit, often times the only options will be lenders with higher interest rates. These lenders can provide a helpful solution when you really need to replace your washing machine or get a new couch. You can spread the cost of this essential expense over time. This helps you solve your problem today and gives you time to pay it off.

But you have to be careful when comparing options. It’s important to look at both the price of the washing machine (or broken fridge, couch, etc) as well as the interest rate. It’s also very important to see what the price is at other retailers, who aren’t offering finance.

Often times finance providers will sell the same goods at a considerably higher markup. This let’s them show a lower interest rate on the finance. But the reality is that the higher listed price is also part of the cost of credit. If you didn’t need credit, you could buy it cheaper at those other retailers.

Because finance providers may have different prices and rates, it’s important to compare both so you know what the real cost will end up being.

Why 0% interest loans are helpful

So now we know that most 0% loans or interest-free loans aren’t really free. There is a cost that shows up somewhere and that cost is usually how the lender will make a profit. That does’t mean no interest loans in the uk are bad. They have many other potential benefits, and like all financial products, you need to compare the true costs and benefits to make a decision.

By removing interest, lenders make it easier for borrowers to understand their charges. Without an interest charge, if they have £1000 of debt outstanding, then they know they need to pay £1000 back. They are aware of the charges, but by separating the charges, they can better plan and budget for them, like other subscriptions.

By offering loans at 0%, lenders also give a borrower time to get their finances in order. If they can put a substantial amount of their outstanding debt onto a 0% transfer card, they can stop worrying about charges piling up and instead focus on how they will make repayments. Removing interest makes things that much simpler which can go a long way when trying to navigate your finances. However, it’s still important to make sure you understand the total cost of credit when comparing a no-interest loan with a more standard interest loan.

Interested in learning more about what Creditspring can offer you?

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How can 0% loans have an APR?

It’s important to understand the difference between an interest rate and the APR. The APR reflects the total charge for credit, including all interest charges and other charges. It is calculated based on a number of factors including the charge for credit, how much is outstanding, and how fast it is repayed.

An interest rate is a specific way to charge a fee. If the cost of the loan is based on an interest rate, you will pay a specific % of what you borrow, determined by that interest rate. The total cost of credit will be your interest charges and that will make up most of your APR. In most loans the interest rate and the APR are very similar if not the same.

For interest free or no interest loans since there is no interest, the interest rate is 0%. However, as we know from the above sections, there is usually still a cost to these loans. This cost will show up in the APR. So in the case of fixed-fee loans, the charge of the fixed fee will make up the APR. For a 0% balance credit card, the transfer fee will show up in the APR.

This is also why some high credit limit cards seem to have very high APRs. The interest charge on money borrowed may not be high, but there are fixed fee charges to get all the membership benefits, like access to airport lounges and holiday insurance.

It’s usually better to use the APR to compare loans with no interest and loans with interest. However, keep in mind that APR is also based on assumptions about how often you will use the credit and for how long. If you won’t borrow as much as they assume, or have it outstanding as long as they assume, then your real ‘APR’ would be different.

APRs can also be confusing when looking at loans less than one year. The ‘A’ in APR stands for Annual, but something less than one year is not annual, hence the confusion. If you only need a loan for 30 days, then a 30 day loan might show a very high APR but would actually be cheaper than a 2 year loan with a very low APR. As always, it’s best to work out the total cost of borrowing, compare that with your need and then make a decision.

One other thing to be aware of is that penalty charges do not show up in an APR. So you might see a loan that has reasonable terms and a low APR and think that is attractive. But if that loan has hard repayment terms and severe penalty fines, it could end up more costly. It’s important to understand what happens if you can’t pay and then make a realistic assessment of your ability to pay. If you are highly likely to trigger a penalty, then the real cost of that loan could be very high.

To get the best understanding when looking at 0% loans, you should work out the real cost in £ terms and let that guide you..

Government schemes and Credit Unions

There has been talk recently of the government launching a truly 0% loan scheme. This will help people with bad credit get access to funds that would otherwise only be available at very high rates. Since the government represents the people and not shareholders, they are the ones who can truly offer interest free loans. The return they are looking for is a return on people rather than a return on rates. Hopefully this scheme will develop further as providing people with access to affordable credit should be seen as essential as clean water and safe streets.

Credit Unions may not offer a 0% interest loan, but they often offer credit at much cheaper rates than would otherwise be available. Credit Unions are constrained by the fact that they can only lend to people in their area, but there has been a lot of innovation recently in this space. Given Credit Unions offer a number of helpful services, it’s almost always a good idea to take a look at them.

Creditspring and representative example

At Creditspring, we believe we pioneered the concept of fixed fee lending. We offer our members loans with no interest in exchange for a monthly fee. That monthly fee offers our members access to on-demand borrowing. The loans have no interest, so members only repay what they borrow.

What they get for their membership fees is also a financial stability score including simple ways for them to improve their stability and access to credit. Even if our members don’t borrow, their credit score gets some help since we report successfully paid membership fees as credit repayments.

When we set out to create Creditspring, we focused on building simple and transparent tools to help people navigate their finances. We discovered right away that very few people understand interest rates. This has nothing to do with education or income levels. Interest rates are confusing.

We realised that once you remove interest rates, great things happen. Consumers no longer have the risk of incurring fees that spiral out of control. People understand how much they owe at any given time. This helps them plan and budget for credit in the same way they plan and budget for everything else in their daily lives.

By removing interest rates we also realised we are much more aligned with our members compared to normal borrower/lender relationships. Unlike lenders who charge interest, we don’t make money if you have more debt outstanding for longer. On the contrary we want you to be in debt for as little as possible. That enables us to focus on helping you improve your financial stability over time rather than lending more and more.

We’d like to describe our product with one word, simple. For £6 per month, our Core members can borrow £250 twice year, without interest. For £8 per month, our Plus members can borrow £500 twice a year, no interest. We collect our debt faster than most providers, over 4 or 6 months. Members can always repay early, and the loans are available on demand.

The APR for our Plus product is 38.6% and for our Core product it is 87.4%. We don’t like how high our Core APR is, but that is mainly a function of how fast we collect our loans. If you compare the total cost of borrowing £250 twice a year, like Creditspring, it can often be cheaper than most other forms of credit. But in other cases it may not. Again, this highlights the importance of comparing all aspects of credit when making a decision, the interest rate is only one aspect.


Creditspring Plus

Rep. example: Total amount of credit of £1,000 over 12 months. The first payment for each advance is £83.35 followed by 5 monthly repayments of £83.33. 12 monthly membership payments of £8. Rate of interest 0% p.a. (fixed), Representative 38.6% APR. Total amount payable £1,096.

Creditspring Core

Rep. example: Total amount of credit of £500 over 12 months. 8 monthly repayments of £62.50 and 12 monthly membership payments of £6. Rate of interest 0% p.a. (fixed), Representative 87.4% APR. Total amount payable £572.


Creditspring APR

Since we are a FCA regulated company and we have mentioned details of our product, we are obliged to show a representative example of our APR.

Interested in learning more about what Creditspring can offer you?

Check your eligibility today and see how Creditspring can help!

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