BORROWING is always a risky business, but there are more ways to get interest-free credit than you might think.
Here are six possible options if you are looking to borrow without paying interest.
With the recent rise in interest rates, borrowing in the form of credit cards, loans, mortgages and overdrafts are expected to become more expensive.
Interest can quickly add up on debt, especially if you’re only making minimal payments, making it harder to clear the money you owe.
Going into debt should never be your first choice – it’s always best to save for anything you want to buy.
Borrowing should always be a last resort and is usually only used in an emergency.
If you need credit, finding an interest-free option can make paying off your debt less stressful – here are some possible options.
Overdrafts without interest
An interest-free overdraft can be an easy way to borrow because it’s tied to your bank account.
Checking accounts with these useful additions are available at all major banks.
For example, First Direct offers an interest-free stamp of £ 250 on all standard checking accounts, while TSB provides £ 100 as standard to Spend & Save Plus account holders.
The amount you have available will depend on your credit rating.
Importantly, overdrafts have caps – and you could face steep fees if you spend over your limit.
Also make sure that your overdraft is authorized which means it is confirmed and approved by your bank.
Many accounts have unauthorized overdrafts, which often come with punitive fees.
If you are opening a new bank account, be sure to check in advance if there is an overdraft and if it charges interest.
You can call your bank to check what is overdraft on your existing account to make sure that too.
Many convenience stores and online retailers now offer interest-free financing if you pay off your purchase on time.
For example, Currys offers six months of interest free credit on purchases over £ 99, subject to terms and conditions.
Amazon also offers interest-free credit to buyers of certain products like electronics.
This is a risky decision, however, and it might encourage you to spend money you don’t have, so be extra careful when considering these plans.
You need to be sure that you can afford the repayments or the interest can be insanely high after the transaction period.
These arrangements are slightly different for buying now and paying later, as they are offered by the stores themselves, so there is usually no middleman.
But since this is still a credit application, it will show up on your credit report and could affect your score.
Buy now pay financing later
This increasingly popular form of borrowing is based on the same principle described above, but on a wider range of products and retailers and on slightly different terms.
Instead of the seller lending you the item until you pay for it, an independent Buy Now Pay Later (BNPL) finance company such as Klarna or Clearpay will guarantee your purchase.
This means that you owe the money to the finance company NOT to the retailer, who forwards your debt to this intermediary company.
This means that it is essential that you know the terms of your loan, as they can vary widely.
Most importantly, lenders will only perform a “soft” credit check on you, which means they don’t know how much you’ve borrowed elsewhere.
As a result, critics warned that BNPL was a slippery slope towards unlimited spending.
Repayments are usually weekly or bi-monthly, so make sure you can afford whatever plan you agree to and be extremely diligent about your repayments.
If you miss a payment and you will likely have to pay a high penalty fee and may have a note on your credit report, in some cases your debt could be transferred to a debt collector.
The sector is still unregulated and in some cases not subject to vital consumer protections, according to Save moneyExpert, so be careful.
You should also be aware that by using BNPL you will lose your Section 75 consumer protection, which means you cannot use chargeback if there is a problem with your purchase.
0% credit cards
These credit cards provide a period during which a zero interest rate is charged on new purchases.
Sounds easy enough – but the key point with a 0% credit card is the length of the interest-free window.
They tend to offer much longer repayment periods than interest-free overdrafts, for example, which typically expect you to pay off your debts within a year.
Barclaycard offers a 24 month 0% credit card, while Sainsbury’s Bank will give you 23 months to pay off your debts.
However, you must apply for it like any other credit card, so you must pass a credit check.
And if you fail to make your minimum monthly payments or go over your credit limit, your coveted 0% rate could be taken away.
Money Saving Expert has a useful function guide to the best on the market, too much.
A credit union can be a vital lifeline for those struggling with their finances.
These are usually local nonprofit organizations whose members pool their savings to lend to each other.
This means that the interest rates are generally lower than those on standard loans or credit cards.
You’ll need to check your nearest credit union’s requirements – some require you to have already saved money with them before you can get a loan.
Moneyfacts is useful guide to credit unions.
Family and friends
Your loved ones may be able to help you get out of a difficult situation without having to take out credit.
While it can be difficult to admit to your friends or family that you need financial help, they may be willing to help if they can.
However, if you are borrowing from someone you know, having a direct conversation about the terms is extremely important.
Ask them how long they are willing to lend you money and if they are expecting more.
We recently spoke to a mother who found herself homeless after borrowing money from a friend who turned out to be a loan shark.
Remember: friends and family shouldn’t be looking to take advantage of you.
Other tips to remember
Borrowing money should never be your first option, and it’s important to keep all of the risks in mind if you’re considering any form of debt.
If you have a bad credit rating, you’re less likely to get the best deal available.
Lenders need only give the advertised rate to 51% of borrowers, so many people end up paying more than they expect.
And as always with credit, don’t overspend just because you can.
It’s all too easy to fall into the debt trap and rack up hundreds, if not thousands, in interest charges.
We’ve looked for ways to make better use of your credit card – and potentially save thousands of dollars.
And here are some red flags that credit counselors keep in mind when considering a claim.
So, one of these options might be right for you – but don’t bite more than you can chew.
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