Where can I get an interest-free loan?
Interest free loans are not widely available in the UK, but they aren't the only way to get interest-free credit.
Key takeaways:
Some lenders may offer an interest free period as a temporary promotional rate, but this comes with certain risks
The interest rate you pay depends on the type of loan, your credit score, the amount borrowed and the loan duration
The most attractive loans with a high credit limit and low interest charges are typically reserved for people with a good credit score
The No Interest Loan Scheme (NILS) offers interest free loans to vulnerable individuals rejected by mainstream lenders
Can I get an interest-free loan?
In the UK, it is not possible to get interest free personal loans. All personal loans charge interest.
Some lenders may offer an interest-free period as a promotional rate, but this is only temporary.
An introductory 0% annual percentage rate (APR) means that for a short period of time you won’t be paying interest on your loan, but these types of savings may only be short-lived and come with risks.
Making a late payment, for example, will often result in the promotional rate/interest free loan period ending early. After which point, hefty interest charges typically kick in.
What type of personal loans have the lowest APR?
Secured loans will usually have the lower APRs compared to unsecured loans. This is because they usually offer larger amounts and lenders have collateral in the form of assets like a car or home.
This added level of trust allows lenders to feel safe offering lowering interest rates on their personal loans.
Unsecured loans, on the other hand, don’t have any collateral, and so usually will have higher interest rates.
Check out our guide to learn more about some of the differences between secured and unsecured loans.
What is the cheapest loan interest rate I can get?
The interest rate you pay will depend on the type of loan you take out, your credit score, how much you want to borrow, and how long you want to borrow for.
Some of the lowest interest rates are typically for secured loans, which at the time of writing (July 2024) can be around 5% or sometimes lower. On the other hand, some of the lowest interest rates for unsecured loans tend to be around 6%.
However, certain types of loans can have highly fluctuating interest rates, so what might start as a cheap rate when you first take out the loan might not stay that way.
The best way to qualify for a low interest loan and improving your chances of borrowing money more cheaply is to ensure your credit score is as high as it can be.
That means taking steps to improve your credit rating by getting on the electoral roll, doing everything you can to clear your existing debt and making monthly repayments in full and on time.
What is the No Interest Loan Scheme (NILS)?
The No Interest Loan Scheme (NILS) is a UK government-backed pilot loan scheme, run by Fair4All Finance, that was trialled in 2022 and offers interest free borrowing.
The scheme saw credit unions and alternative lenders offer interest free loans to vulnerable people in financial difficulty, who had been rejected for credit by mainstream lenders. And who might otherwise have to resort to high interest payday loans to borrow money.
Interest free loans offered through the NILS could not be applied for directly. Instead, people that are eligible are referred to the scheme by a housing association, credit union, or a participating lender.
Borrowers referred to the scheme can take out interest free loans between £100 and £2,000 to cover essential expenses.
While the initial pilot brought 20,000 people into the scheme, plans are afoot to expand the scheme to many more vulnerable people in 2025.
How much can I borrow from NILS?
NILS offers interest free loans up to £2,000, with the interest free loan paid into recipients' bank account within two days of applying.
Can I get an interest free loan if I’m receiving benefits?
A budgeting loan, also known as a budgeting advance, is an interest-free loan backed by the UK government specifically for UK residents receiving certain benefits.
This type of interest free loan is intended to be used to pay for certain essential costs, like clothes, funeral costs, and home maintenance.
A personal loan is only available in these circumstances if you have been claiming one or more of the following types of benefits for the past 6 months:
Income Support
Income-based Job Seekers’ Allowance
Income-related Employment and Support Allowance
Pension Credit
The amount you can borrow with this type of loan starts from £100, with maximum borrowing limits depending on whether you have a partner or are claiming Child Benefit.
You can visit gov.uk to learn more about budget loans and check your eligibility.
How can I get interest-free credit?
While in most cases you can’t take out an interest free loan, there are other types of credit available that are interest free and could be a good alternative way to borrow money.
0% purchase credit cards
Interest-free purchase credit cards don’t charge interest for purchases for a set period. However, after the end of that period, the credit card’s standard interest rate will kick in and be applied to any remaining balance.
Because of the enticing 0% promotional interest rate, this type of credit card tends to have a slightly higher interest rate than others.
That is why it is so important that you read the fine print when applying for a credit card.
0% balance transfer credit cards
Balance transfer credit cards allow you to transfer the balance from an existing credit card to a new one.
You would normally do this to get out of paying high interest on an old card and make the most of the initial interest free period or low interest rate on your balance transfer card.
Balance transfer cards normally have a one-off transfer fee to secure the interest free period. Fees can range between 1% and 3.99%, and the interest rate that kicks in after the interest-free offer expires can be higher than usual.
For that reason, it's vital to remember that if you opt for a balance transfer credit card, it's only an 'interest free credit card' for a limited period and that it'll only remain interest free if you abide by the provider's rules for borrowing money.
Interest-free shopping credit
Many retailers have buy-now-pay-later (BNPL) schemes that offer 0% short-term loans to spread the cost of your purchase rather than pay the full amount upfront.
These schemes can be a cheap and easy way to access free credit and break up large payments into manageable amounts. However, just like personal loans, credit cards and other forms of borrowing money, these schemes have their drawbacks and potential pitfalls.
Late fees for missed payments can be hefty, and consistently missing repayments can add up to a debt that might even be greater than your original purchase.
That’s why you shouldn’t choose a BNPL option if you’re not confident that you can keep up with your repayments.
Interest-free overdrafts
Some types of bank accounts allow you to spend from your overdraft without being charged interest. This can be done in two different ways.
Some bank accounts with an interest-free overdraft allow you spend into your overdraft up to a certain amount without paying interest.
If you continue to spend past this point, you will pay interest on anything you’ve spent over the interest-free amount.
Other bank accounts that advertise an interest-free overdraft may only offer this rate for a limited time as part of a promotional period – typically up to a year.
At the end of this interest free period, the standard interest rate will kick in and be applied to your current overdraft.
It’s not uncommon for these types of bank accounts to have higher overdraft interest rates than normal.
How do I qualify for low interest loans?
A low credit score, or bad credit score, is one of the biggest barriers to being able to borrow money cheaply.
If you think that's what's preventing you from getting a low interest rate on a personal loan, the first step is to get hold of your credit report and study what appears on your credit history for errors.
You should also make sure you're on the electoral roll, close down any credit accounts or bank accounts you're not using, and make sure you stay within your credit limits.
MoneySuperMarket is a credit broker – this means we’ll show you products offered by lenders and make it easy to compare loans. We never take a fee from customers for this broking service. Instead, we are usually paid a fee by the lenders – though the size of that payment doesn’t affect how we show products to customers.
