All You Need to Know About Interest-Free Loan

Curious about interest-free loans and how they work? Read our comprehensive guide to learn everything you need to know!

20 Feb,2023 10:00 IST 2107 Views
All You Need to Know About Interest-Free Loan

Interest is a critical component of any kind of loan, which can make or break any decision on raising funds. Therefore, when one hears “interest-free loan” it instantly becomes more attractive.

This type of loan is also referred to as a “zero-interest loan” because there are no interest charges associated with it. One is required only to repay the principal amount.

There are various options for choosing interest-free loans from different lenders for varies purposed such as funding education, purchasing a home or a car, or paying for a vacation, among others.

Such schemes are a common marketing practice among retailers and lenders to entice customers to make purchases.

Are Interest-Free Loans Actually “Interest Free”?

It is important to note that even though a loan may not carry any interest, it is not necessarily free. However, the terms may vary from lender to lender.

Many lenders may charge an extra fee to offer an interest-free personal loan. Therefore, the borrower will not have to pay the interest but will require to pay origination fees, prepayments, and application costs, etc.

As the fees are usually subtracted from the amount before disbursal, one may need to increase the loan amount to end up with the required funds.

Also, in case of any default in the repayment of the principal amount within the prescribed time frame, hefty penalties, and fines are usually levied by the lender.

The key to such loans is to read the fine print carefully. Prospective borrowers must make sure they understand all the conditions applied and the charges levied on the loan before making any decision regarding the loan.

Also, to qualify for the 0% interest, one typically needs to fulfill certain requirements, and it might only be available for a limited time.


The eligibility criteria for a zero-interest loan may vary for each lender. Broadly, the standard eligibility conditions are:

• One must be over the age of 21 and should not exceed 65 years
• One must have identity proof such as an Aadhaar card, driving license, or PAN card.
• One must meet the minimum monthly income criterion of the bank or the NBFC.

Pros Of Interest-Free Loans

Interest-free loans offer several advantages. These include:

Saving Money:

Interest-free loans can help one to save money if it is paid back in a timely manner. They are usually cheaper than other forms of credit such as loans with interest, high-interest credit cards, and other external borrowings.

Instant Approval:

A no-interest loan can be obtained more quickly than other loan types. The paperwork and documents do not take as long. It is unquestionably advantageous, especially in particular situations like interest-free mortgages or student loans. It is easy to complete the minimal paperwork and other formalities to qualify for these loans.

Negotiate Better Terms:

If one has a strong credit history and good relations with the lender, the borrower can negotiate better terms for interest-free loans, which could include waiving some charges and fees levied on the loan.

Can Allow You To Afford Things Sooner:

Many times, high-value purchases remain on the wish list for long periods of time for the lack of funds. Such a loan allows one to make the desired purchase at easy and affordable terms.

Cons Of Interest-Free Loans

May Require A Good Credit Rating:

Some lenders may have a minimum credit rating requirement for the disbursal of interest-free loans.

Restricted To Certain Products:

Interest-free loans are typically used by companies to sell expensive goods to customers who might not otherwise be able to afford them. So, one is most likely to find such offers on products such as expensive mobile phones or gadgets, automobiles, or even expensive travel plans.
It is unlikely that one will find no-interest loans on low-value purchases such as groceries.

Read The Fine Print:

Zero-interest loans are used as an attractive tool by advertisers and marketers to catch a customer’s attention by giving the impression that a loan is free. However, most often one will discover hidden charges or fees.


Many lenders may offer terms, such as an interest-free loan, that may sound extremely attractive to a customer. Therefore, it is important to make cautious decisions and read all the terms and conditions attached to the loan.

While many banks and non-banking finance businesses provide various loan options, it is critical that one considers borrowing money from a reputed lender like IIFL Finance.

IIFL Finance, one of India’s largest non-banking finance companies, offers a variety of loans including personal loans, business loans and gold loans through a digital process that can be completed quickly and requires minimal paperwork. The company also customizes the loan repayment terms to make it easier for the borrowers to clear their debts.

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