0% Loans and How to Find Them

A zero-interest loan sounds too good to be true. Who would want to give you a free loan?

Plenty of people, it turns out.

Car dealerships, mattress sellers, appliance stores and credit cards are some of the businesses that hope to gain customers by selling things through 0% loans.

The big sticking point for many of these is that an excellent credit score is needed.

They also limit how long you can borrow money at 0% interest. Usually, a high interest rate takes effect a year later, though no-interest car loans can last for five years.

What is a Zero-Interest Loan?

You may have been offered a store credit card upon checkout that gave you an immediate discount on your purchase, and no interest on the initial charge for six months or more. Or maybe you’ve seen an advertisement for a car offering a zero-interest loan on a new car.

All of these are zero-interest loans that have a few things in common.

It starts with a promotional period where no interest is charged on the loan. When the promotional period ends, you’ll pay interest on the remaining balance.

The promotional period can be anywhere from a few months to five years. Pay off the loan before that timeframe ends and you don’t have to pay interest on it.

These loans are different from deferred-interest loans, which are sometimes offered by retail stores. These loans also don’t require paying interest if the balance is paid off during the promotional period. But if the balance isn’t paid off by then, the interest is charged retroactively to the date the items were purchased.

Zero-interest loans only charge interest after the promotional period on the unpaid balance. So if you pay off some of the balance, you won’t be charged interest on it later.

How Do You Get One?

These deals aren’t hard to miss. Advertisements and signs throughout the store, along with salespeople and cashiers, will often tout zero-interest loans.

They require filling out a short loan application form. Your credit score will be checked and if it’s high enough, you’ll be approved. Some credit checks can be done on the spot.

In general, excellent credit is needed to get a zero-interest loan. Having poor credit will unlikely lead to approval.

When 0% Financing is a Good Idea

Getting a loan without being charged interest for a few years can make a big purchase more affordable.

If you were going to buy that mattress, car, living room set or other big purchase anyway, a 0% loan can give you a year or more to buy it. Just divide the total cost by the number of months at 0% interest, and make those payments each month and you can get easy access to credit.

These loans are a good idea if you can afford to pay off the loan during the promotional period. And they’re also worthwhile if you’re getting a good deal on whatever you're financing with them, instead of being charged a higher price for something because it’s being financed.

When 0% Can Be a Bad Idea

After the promotional period, interest rates can go as high as 25% or so. Read the fine print in the contract and be sure to pay it off a few weeks before the rate changes.

If you’re unsure if you can pay off the loan during the promo, or you’ve had trouble lately paying all of your bills and have made some late payments, a 0% interest loan may not be for you.

Some 0% interest loans may require minimum payments during the promotional period. Missing a payment could trigger an automatic interest rate increase.

Take your time and read the loan contract before agreeing to it. Don’t allow yourself to be pressured by salespeople trying to get your business. If necessary, take it home to read and return another day if you still want the loan.

Does It Affect Your Credit?

Applying for any type of new credit, including a zero-interest loan, can hurt your credit score. It won’t be a major ding against your credit score, but it can temporarily lower it a few points.

This is called a credit inquiry and is one of the smallest ways to lower a credit score.

What mainly affects a credit score is how you use credit. Paying your bills on time and in full has the biggest impact on a score.

A zero-interest loan can improve your credit if you make payments on time. Making them late or missing them entirely, however, can hurt your credit score and make a 0% interest loan a lot less of a deal than it was originally.