Many people turn to personal loans when it comes to borrowing choices. As per a report, personal loans in India saw a 46% growth in origination from FY-2021 to FY-2022. This indicates that a large number of people prefer to take out loans for expenses and emergencies. However, these loans come with an interest rate that is usually higher. In such a situation, interest-free personal loans can be an alternative to saving money on loan repayments.
Let us first understand what an interest-free personal loan is.
What is an Interest-Free Personal Loan?
An interest-free personal loan or zero-interest personal loan is a type of financial aid that allows you to pay only the principal amount you borrowed from the lender. It does not charge any interest on the credited amount. With interest-free personal loans, you can avail a loan for personal purposes like any other traditional loan.
Understanding Interest-free Personal Loan
Interest-free personal loans sound interesting. However, you must know that while lenders take no interest, they charge for other services like origination fees, application costs, prepayment charges, etc. These amounts are typically deducted from your borrowed amount. Therefore, you might need to apply for more amount than you initially needed.
Since the borrower secures no collateral nor pays any interest, the penalties for missed EMIs or loan default can be much higher than for other loan options. Thus, it is advised that the borrower must read the terms and conditions before applying for the loan.
Eligibility for Interest-Free Personal Loan
If you are considering applying for an interest-free personal loan, then you must know the eligibility criteria. Usually, eligibility varies from lender to lender, but here are some general eligibility criteria:
- The minimum and maximum age requirements should match as specified by the lender.
- The applicant or borrower must have identity proof like an Aadhar card, driver’s license, or PAN card.
- The applicant must meet the minimum monthly income criterion of the lender.
- The applicant should have a decent credit score.
Advantages of an Interest-Free Personal Loan
Here are some advantages of taking an interest-free personal loan:
- Cost Effective
As interest-free personal loans require no interest charges, there are high chances of saving money if the loan is repaid on time. This allows the amount to be repaid without any extra charges or penalties, eventually saving you money. You can also avail of discounts if you have a good credit score. However, this benefit varies from lender to lender.
- Instant Approval
An interest-free personal loan is instantly approved. Whether you want to pay for food, clothing, or a student loan, it only takes a few clicks to get your loan approved. The paperwork and documents do not take much time anymore as all the requirements can be digitally given.
- Instant Purchase
With everything going digital, you can now buy whatever you want with just one click. Apply for an online interest-free personal loan at your trusted loan-providing app or bank and get the amount credited to your account instantly.
Disadvantages of an Interest-Free Personal Loan
Every coin has two sides: good and evil. Therefore, let us now acquaint ourselves with the disadvantages of interest-free personal loans so that you can make the right decision for yourself.
- Not Having a Good Credit Rating
Lenders usually prefer a good credit score of at least 700. However, as the requirements are different for various lenders, you might get to negotiate with the lender. Consult a professional to seek possible outcomes for your credit score.
- Limited to Only Certain Products
Interest-free loans are used explicitly for expensive products, such as buying a washing machine or a car. You can avail of an interest-free loan and repay the amount via EMIs.
- Added Financial Burden
You can face financial strain if you are not able to repay the loan. As heavy penalties are levied on delayed payments, you can find yourself in a loop of negative credit scores. Therefore, it is advised that you plan your finances and budget before availing of any instant interest-free loan.
- Read the Fine Print Carefully
You must read the T&Cs very carefully to catch any hidden or applicable fees on the loan. This will allow you to save yourself from unwanted shocks and financial strain.
- A Pattern of Credit Mismanagement
Due to their easy and instant approval, you can catch the habit of loaning money for purchases without having a solid repayment capacity. This will only drag you down a rabbit hole of mismanaged credits. For example, rampantly buying luxurious items without an income will cause you financial strain.
Conclusion
An interest-free loan is a better alternative to other funding options, such as traditional personal loans, high-interest credit cards, or peer-to-peer borrowing. If used correctly and responsibly, you can save money on penalties and credit scores. A good credit score will aid you in negotiating charges levied on you by the lender. Some government programs also provide interest-free loans to people in immediate need of monetary funding.
Additionally, always remember to check and plan your finances before applying for any loan to save yourself from financial strain. Do consider the above-given factors regarding a zero-interest loan before applying for it.
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