What is no-interest financing?

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The term ”no interest financing”refers to a type of loan or credit instrument that requires no interest charges from the borrower for a fixed period of time.  This does not mean that a no-interest loan has no other finance charges. It merely avoids the traditional interest payments associated with the loan’s interest rate.

“No interest ‘til next year!”

Many retailers, manufacturers and even creditors use no-interest programs to stimulate sales and business activity. Common types of no-interest financing include the following loan and credit programs:

  • Car manufacturer no-interest loans. Many automobile manufacturers periodically use no-interest financing to encourage vehicle sales at their participating dealerships. The major car manufacturers all have automobile financing subsidiaries providing car purchase financing for qualified borrowers. No-interest car financing may be offered during promotional periods for qualified buyers, with the loan waiving interest charges for a set number of months or years. Note that although no interest is charged, these car loans may still have standard loan, closing and title fees.
  • No-interest credit offers. Similarly, retailers with their own store credit programs occasionally offer no-interest financing for qualified buyers. Whether it’s a furniture store or department store, these no-interest credit offers will finance part or all of a customer’s purpose, with the interest charges waived for a set number of months or years.
  • No-interest credit card balance transfers.  Some credit card providers also use no-interest financing offers to encourage current and prospective credit customers to transfer their credit card balances to that creditor. Again, the no-interest period is typically limited to several months or a few years at most. Although the borrower incurs no interest charges, many of these credit card providers do charge a fee for transferring balances.

These types of no-interest incentives are commonplace  during the holidays, but they can be found throughout the year.

However, as mentioned above, the no-interest offer is usually limited to a specific amount of time. Once the no-interest period expires, any remaining balance that the borrower has on the credit card or consumer loan will start incurring interest charges. But make sure to read your agreements carefully, as some no-interest financing programs may actually charge interest retroactively.

Interest-alternative loans

Some consumer and personal loans labeled as “no interest financing” may actually be loans that provide the lender or creditor with compensation – in a structure other than interest. For individuals and communities who have religious or personal prohibitions against the charging or paying of interest, these interest-alternative loans may provide a practical workaround.

The following are examples of no-interest financing programs that provide an alternative to standard loan interest charges:

  • Flat fee loans. One variation of the no-interest loan charges a flat fee or finance charge for the loan, instead of an interest rate. The borrower must pay the loan fee whether the loan is paid on time, paid off early or paid after the scheduled maturity date.
  • Rent to own. Another variation of no-interest financing is a lease or rent to own arrangement. In this program, the lender purchases or owns the property the borrower wishes to acquire. The borrower then leases the property, with all or a portion of the lease payments being applied to the purchase price.
  • Buy-resale. In this variation of no-interest financing, the lender may purchase the property wants to acquire. The lender then resells the property to the borrower at a higher price, creating a profit for the lender (who is effectively an investor). The borrower, however, can pay off the higher price over a period of time and with installment payments.

Though not widespread, these types of interest-alternative lending programs are available in many countries and communities.

Regardless of the type of no-interest financing being considered, consumers need to review all the details of the proposed loan and conduct their due diligence before agreeing to any type of credit or loan offer. This includes researching alternatives and speaking with a knowledgeable financial advisor.

Disclaimer: NetCredit is a direct personal loan provider and does not provide financial advice, nor does it vouch for any vendor or service mentioned on our NetCredit personal finance blog or online consumer loan glossary. Always research and perform due diligence on any service provider or vendor before deciding to use them, and we recommend that you speak with a financial advisor regarding all decisions that will affect your finances.

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