Credit typically comes at a cost. When we borrow a loan or use a credit card, we incur an additional cost of borrowing which we repay along with our monthly instalments. This cost of borrowing is the interest that we are charged on credit.
This interest can vary from one lender to another and usually depends on your ongoing financial circumstances and credit history. The average interest that you can incur on loans ranges from 5-35%. But what if there was a way to avoid this additional cost?
Interest-free loans are a common phenomenon these days. Read on to learn more about the concept. Are they similar to 0% interest credit cards? Find out here!
The interest rate charged on a loan is fundamentally the cost of borrowing money, expressed as an annual percentage of the loan amount. Whenever we borrow credit, we repay the principal plus the interest charged on the loan, usually through fixed monthly instalments.
For instance, if you borrow an amount of £5000 at an annual interest rate of 8% for a year, you will effectively owe £5400; where £5000 is the principal and £400 is the interest on the loan (8% of 5000).
The total duration could be vary depending on the length of the repayment period – the longer you have a balance on your loan, the longer you’ll have to pay interest on it.
Whenever you borrow a loan, the lender assesses your credit history and financial circumstances to determine the correct interest rate for you. This cost can be calculated as an annual percentage of the borrower amount. You then repay the money along with interest via fixed monthly instalments.
Apart from your credit profile and financial standing, a critical factor that influences changes in interest is the base rate set by the Bank of England. The BoE base rate currently stands at 0.1%, which is the lowest it’s ever been in the bank’s 326-year-old heritage.
The BoE base rate is the basis for the interest rates set by financial institutions. If there’s an increment in this rate, the interest rates will most likely go up as well. Conversely, if this rate plummets, then the interest rates will likely go down.
When they hear ‘interest-free’, the first thing that would pop up in peoples’ minds is a credit card. Most credit cards offer promotional periods of 0% interest that sometimes last for up to 2 years. Not a lot of us would think of interest-free loans of the top of our heads.
Interest-free loans undoubtedly sound like an enticing proposition for borrowers. Conceptually, these loans completely justify their straightforward terminology – they’re loans without interest. Interestingly, these loans may not be entirely free either.
Lenders advertise these loans as seemingly ‘interest-free’ but still get you to pay a fee in some or other way. There are three main ways for them to accomplish this:
Most people opt for interest-free loans to cover big-budget expenses. Some of these expenses include:
An interest-free loan may sound like the ideal credit solution, but there are several implications associated with it. Here are some questions you should reflect upon before considering an interest-free loan:
Contemplating these areas might help you make a better borrowing decision. It would be best to factor in the pros and cons of interest-free loans as well:
Interest-free loans can be instrumental in easing your financial burden, especially when you’re planning to make a big-ticket purchase. But it is vital to understand how the product works before opting for such credit. Advertisements can easily colour your opinion, so consider the pros and cons before borrowing this loan.
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