The words 'interest-free credit' usually put me on my guard immediately. Many of these deals come with enormous, scary hidden catches. Anyway, in a perfect world, we'd all live within our means and never spend money we didn't have.
Unfortunately, that's not always how it works. But genuinely interest-free loan deals do exist – and when you really need to access extra cash, they can be an economical and useful financial tool.
They can also help you get your finances back under control, by chopping the amount of interest you're already paying on debts.
Here, I'm going to highlight three good ways of getting interest-free cash. I'm also going to outline the pitfalls you need to watch out for – so your 'free' money doesn't drag you deeper into the financial mire.
By the way, if you've been hunting through the personal loans section, you won't have found these options. In fact, providers don't label them as 'loans' at all!
1) An interest-free overdraft
Some current accounts have a 0% interest overdraft facility included in the package.
To qualify for the Santander 123 Current Account, you need to be able to pay in £500 a month, every month, and you'll have to pay an account fee of £2 a month. Then you'll get an interest-free overdraft for four months so long as you use the bank's 'dedicated switching service' to transfer over your direct debits. As a bonus, you will earn cashback on the direct debits you set up from the account – 1% on water, council tax bills and Santander mortgage repayments (if you have one), 2% on gas and electricity bills and 3% on communications bills such as phone, broadband and digital TV – which should cancel out the monthly fee.
With the Santander Everyday Current Account, you can get the same interest-free overdraft of up to £1,200 for four months but you don't have to pay the £2 monthly fee and you won't earn cashback.
After four months, both accounts will apply a 'usage fee' of £1 a day capped at 20 days or up to £20 a month.
Alternatively, if you're aged between 18 and 27, you could get a fee-free overdraft of up to £3,000 with Dankse Bank's Danske Freedom current account. Note that this account only allows you to make four free cheque payments a month.
Remember that the size of the interest-free overdraft you're offered will also depend on your credit rating.
How long is the cash interest-free? Again, it depends on the account, but borrowing via a 0% overdraft is definitely not a long-term borrowing solution. Unless you are a student, the majority of current accounts will only let you have an interest-free overdraft for the first few months.
After this, you'll be charged substantial interest on your remaining negative balance (or in some cases a fixed daily fee) so you need to make sure you've paid off your debt within the 0% period.
What to watch out for: It's very important you don't exceed your 0% overdraft limit. Doing so will push you into an 'unauthorised' overdraft – on which you'll be charged horrendous rates of interest (typically 20-30% APR).
How much can I borrow? A credit card will normally indicate what its maximum credit limit is before you apply. However, the credit limit you're offered might be much lower, and (like an overdraft) will depend on your personal financial circumstances.
How long is the cash interest-free? This depends on the credit card. At the moment, the market-leader is the Tesco Clubcard Credit Card, which offers 0% interest on new purchases for 16 months.
So again, as you can only borrow interest-free for 15-16 months, it's not a long-term borrowing solution.
The good thing with the Tesco card is you can effectively earn up to 6.75% cashback for every £1 you spend, using the Clubcard Reward Scheme (for more information read this article). The points you earn can be exchanged for vouchers that can be used on holidays, rail travel, restaurants and days out. But don't be tempted to spend more than you can afford to as a result.
What to watch out for: When your 0% deal ends, you'll be charged a very high level of interest on your remaining balance (typically 15-20+% APR) – so it's crucial you clear your balance before this happens.
If you do still have a balance remaining when your 0% deal ends, you could try to take out 0% balance transfer card (see below) and shift the leftover debts across to it.
However, this is a very risky strategy. We all know how much lenders have tightened up on giving credit, and there's no guarantee you'll be one of the lucky ones!
You also need to make absolutely sure you make the minimum repayments every month (more if you can afford it). If you're late or default on a payment, you may well be fined, and your 0% deal is likely to be whipped away from you.
3) A 0% balance transfer credit card
If you're already paying interest on a debt, you could turn it into an interest-free loan by shifting it onto a credit card offering 0% on balance transfers.
How much can I borrow? As with a 0% purchase card, a 0% balance transfer credit card will normally indicate what its maximum credit limit is before you apply. However, the credit limit you're offered will depend largely on your credit rating and salary.
How long is the cash interest-free? Again, this depends on which card you choose. At the moment, the longest general balance transfer deal is on offer from Barclaycard. It lasts for 24 months (with a 2.1% or 3.2% balance transfer fee, depending on how much debt you're transferring). After this, the typical APR is 17.9%.
What to watch out for: While you'll temporarily eliminate interest payments on your debt, this is not totally free money: The vast majority of balance transfer credit cards charge transfer fees (typically 2-3% of the total debt) to move your money onto them.
If you don't manage to clear your debt during the 0% period, you'll be saddled with big interest charges. Rates will typically be between 15-20% APR – but there are plenty of horror stories about people being charged 30% APR or even more!
And again, make absolutely sure you make (at the very least) the minimum payments every single month. Otherwise, you could end up with a fine and a hefty rate of interest on that large balance!
A longer-term, low-rate solution
As you can see, all these are relatively short-term borrowing solutions. If you need a low-interest repayment plan lasting much longer than a year, a long-term, low rate credit card might be a better solution for you.
The new Barclaycard 4.9% for 36 Months credit card offers, as the name suggests, a low interest rate of 4.9% for three years on any debt you transfer across. There's also no balance transfer fee. However, you can't transfer debts across from other Barclaycards.
Alternatively, the Sainsbury's Low Rate Credit Card offers a low rate of 6.9% APR (variable) on both purchases and balance transfers for the lifetime of your debt. And no transfer fees apply.
Alternatively, you may qualify for a low rate loan. The Derbyshire Building Society current offers a personal loan with a representative interest rate of 5.4%.
Tax tricks to improve your wealth
Three ways to get an interest-free loan
If you wear a uniform of any kind to work and have to wash, repair or replace it yourself, you may be able to reclaim tax paid over the last four years. For some people, this could mean a windfall worth hundreds of pounds
The interest you receive on savings accounts (with the exception of cash Isas) is automatically taxed at a rate of 20%.
Higher-rate taxpayers therefore tend to owe money on the interest they are paid throughout the year. If, however, you are on a low income or not earning at all, you should be able to claim all or some of the tax deducted back
You can apply for a refund of vehicle tax if you are the current registered keeper or were the last registered keeper of your vehicle that no longer needs a tax disc
If you pay tax on a company, personal or State Pension through PAYE (the system employers use to deduct tax from your wages), you may well end up overpaying
There is a limit to the amount you need to pay in NI, whether or not you work for an employer.
Instances in which you may find that you have overpaid include if you work two or more jobs and earn more than £817 a week and if you move from self-employment to employment, but continue to pay Class 2 National Insurance contributions