Three ways to get an interest-free loan

CashHere are three routes to interest-free money that won't be found in the 'loans' section of your bank!

The words 'interest-free credit' often equal enormous, scary hidden catches. Anyway, in a perfect world, we'd all live within our means and never spend money we didn't have.

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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, we're going to highlight three good ways of getting interest-free cash. We'll also 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.

How much you can borrow and for how long depends on your circumstances and the account you go for. The market leader at the moment is the FlexDirect account from Nationwide, offering a 12-month fee-free overdraft, subject to your circumstances. It also pays 5% interest on your balances up to £2,500, which is better than most savings accounts.

You will need to pay in £1,000 each month to qualify though.

There's also Halifax's Current Account and Reward Current Account, which are both free to use. The planned overdraft amount you'll be allowed will vary depending on your credit rating, but the good news is you can transfer your existing overdraft over to Halifax. The fee-free overdraft facility will last for six months.

What's more, you'll get £100 free when you switch via the bank's switching service, providing you transfer across at least two direct debits. And if you choose the Reward Current Account, you'll earn £5 a month, providing you pay in at least £750 each month. You'll need to open the account in a Halifax branch to qualify. If you have an overdraft and credit card debt to transfer, make sure you read on to the 0% balance transfer credit cards section of this article, as Halifax is also offering a fee-free and interest-free (for 15 months) credit card as well.

There are also two Santander accounts that offer fee-free overdrafts: the 123 Current Account and the Everyday Current Account.

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.

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).

Compare the top bank accounts

2) A 0% on purchases credit card
The other main way of getting a totally 'free' loan is to take out a credit card that offers 0% interest on all new purchases.

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.

At the moment, the market-leader is the Tesco Clubcard Credit Card, which offers 0% interest on new purchases for 16 months.

Other good deals include the Halifax All in One credit card and Marks & Spencer's credit card, which both offer 0% for 15 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. 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.

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.

Compare the top 0% purchase credit cards

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.

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 26 months (with a 3.5% balance transfer fee, although you'll receive a £10 refund on transfers of £2,000 or more). After this, the typical APR is 17.9%.

But if you switch your current account to Halifax between now and 7th July, you'll be eligible for an offer on the Halifax All In One credit card. This gives you a 15-month interest-free period for balance transfers and a refund of the 3% balance transfer fee charged. However, you must transfer your balance by 31st July. If you don't want to switch your current account to Halifax, you can transfer your balances onto the All In One credit card and pay a 1.5% balance transfer fee. Note that you'll need to open the current account and do the balance transfer in a branch to qualify.

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 of 2-3% of your total debt to move your money onto them.

More importantly, 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!

Compare the top 0% balance transfer credit cards

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 Sainsbury's Bank Nectar and Sainsbury's Bank Cashback Low Rate credit cards offer, as the names suggest, low interest rates of 7.8% on any debt you transfer across. There's also no balance transfer fee. And you can also earn Nectar points and cashback respectively on your Sainsbury's shopping.

Alternatively, you may qualify for a low rate personal loan. Derbyshire Building Society currently offers a personal loan with a representative interest rate of 5%. Just make sure you can afford to pay your monthly repayments and don't use it as an excuse to rack up more debt.

See the latest personal loan rates


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Three ways to get an interest-free loan

More than 46,000 of 106,000 the complaints received by the FOS in the second half of last year related to payment protection insurance (PPI). And the organisation is expecting to receive a record 165,000 PPI complaints in 2012/2013.

The huge numbers are due to the PPI mis-selling scandal that should now be a thing of the past, but there is no doubt that the insurance, which can add thousands to the cost of a loan, is highly unpopular!

(Pictured: Martin Lewis after the PPI payout ruling)

Complaints about mortgages jumped by 38% in the last six months of last year, the FOS figures show, compared to an increase of just 5% in investment-related complaints.

Common gripes about mortgages include the exit penalties imposed should you want to sell up or change you mortgage before a fixed or discounted deal comes to an end, and the high arrangement fees charged by many lenders.

While there is nothing in the data released by the FOS about the number of complaints relating to savings accounts, hard-pressed savers have been struggling with low interest rates for several years now.

You can get up to 3.10% with Santander's easy-access eSaver account, but many older accounts are paying 1.00% or less and even this market-leading offer includes a 12-month bonus of 2.60% - meaning that the rate will plummet to just 0.50% after the first year.

Banks are imposing the highest authorised overdraft interest rates since records began, with today's borrowers paying an average of 19.47%, according to the Bank of England.

A typical Briton with an overdraft of £1,000 is therefore forking out around £200 in interest charges alone. Coupled with meagre returns on savings, it's enough to make your blood boil!

While authorised overdrafts may seem expensive, going into the red without permission will cost you even more due to huge penalty fees.

Barclays, for example, charges £8 (up to a maximum of £40 a day) each time that there is not enough money in your account to cover a payment.

If you need to send money abroad, the likelihood is that your bank will impose transfer charges - and offer you a poor rate of exchange. Someone transferring a five-figure sum could easily lose out by £500 or more as a result.

The good news, however, is that you can often get a better deal by using a currency specialist such as Moneycorp.

Automated telephone banking systems, not to mention call centres in far-flung parts of the world, are one of our top gripes - especially as we often encounter them when we are already calling to report a problem.

In the words of one disgruntled customer: "What is it about telephone banking that turns me into Victor Meldrew? Well, maybe it's the fourteen security questions, maybe it's the range of products that they try to push or maybe it's because I'm forced to listen to jazz funk at full volume while my phone bill soars.

"Actually though, I think it's because the people I eventually speak to rarely seem able to solve the issue I'm calling about."

The days of a personal relationship with your bank manager are long gone - for the huge majority of us at least.

When ethical Triodos Bank investigated recently why around 9 million Britons would not recommend their banks to a friend or relative, it found that almost a third felt they were not treated as individuals. Another 40%, meanwhile, were simply disappointed with the customer service they received.

When you're in a rush, the last thing you want to do is wait in a long queue at your local branch.

Researchers at consumer champion Which? recently found that most people get seen within 12 minutes, but you could have a much longer wait if you go in at a busy time. Frustrating stuff!

The Triodos Bank research also indicated that the bonus culture that ensured the bank's high-flying employees received large salaries, even when it was making a loss at the taxpayer's expense, was hugely unpopular with consumers.

About a quarter of those who would not recommend their current banks said this was the main reason why. And with RBS executives sharing a £785 million bonus pool despite the bank, which is 82% publicly owned, making a loss of £2 billion last year, it's not hard to see why.

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