Anyone who has ever borrowed money from a bank knows the compulsory interest, which must be repaid in addition to the pure loan amount. The fact that there are interest-free loans is therefore surprising for many bank customers. They are certainly offered. Since the European Central Bank has lowered the key interest rates more and more, loans are now available without interest.
Overview – What are interest-free loans?
So far, the interest-free loans were mainly known as a marketing measure of the banks. When buying some consumer goods, something a car, some partner banks renounced the interest rates and so traders were able to promote the zero-percent financing. These offers were tailored to a specific purpose and were not freely usable loans.
In the meantime, however, alternative banking systems have evolved that consciously forego interest rates. Moreover, given the developments on the financial market, interest rates are increasingly disappearing towards the zero mark, even for traditional loans.
Find out about interest-free loans and their requirements
Some banks offer small loans that are not accompanied by interest payments. Customers can borrow the money for free and only have to repay the borrowed loan. Thus, there are no costs for the use of such a small loan. This special type of loan is usually only given on a small scale, for investments of up to 2,000 euros.
Often, behind these offerings for interest-free loans are new customer actions. Because even banks give away money and have to refinance the loans they spend. Many of the offers are tied to a precisely defined repayment term, such as over one year, over two years or over 36 months. In addition, the amount of the loan is exactly fixed.
Customers can not usually choose between different conditions, but only borrow exactly 1000, 1500 or 2000 euros or similarly low sums. Thus, the offers belong to the category of small loans. In addition, the creditworthiness of the customer is required and checked on the basis of Private credit information or information from other information services. Alternatively, proof of income or guarantor is required.
A sample bill for an interest-free loan
Loans that do not generate interest must be repaid in the same way as loans with interest. The only difference is that, in addition to the borrowed amount, which is repaid in monthly installments, no interest will be charged. For example, anyone borrowing 2000 euros as an interest-free loan and agreeing a repayment term of 36 months must repay 55.56 euros each month. With longer term the monthly rates become smaller.
Which special forms / lower forms are there?
- Consumption-enhancing loans
In retail, interest-free loans are widely used. Traders advertise here that customers can finance electrical appliances, new furniture or vehicles without having to pay interest. The offers offer about 5000 euro loan amount, which are repaid over 36 monthly installments and attract with an annual percentage rate of 0.0 percent. Here is a so-called purpose binding. The loan is not provided by a regular bank but by a partner bank of the dealer, such as the partner bank of an automaker. The money must not be used freely. It is specifically intended for the financing of the respective vehicle or product.
- Religious loans
Interest-free loans are also granted by banks that follow the Islamic legal system. According to the interpretation of Islamic religious rules, Sharia, interest is not allowed. These banks do not charge interest, but, in order to work economically, demand surcharges, profit-sharing from financed companies, or fees for borrowing. Alternatively, the no-interest movement has developed. This has its origin in Sweden. Members of the cooperative banks jointly save capital and borrow each other to finance projects. Interest does not accrue. The bank keeps only a small contribution of the paid-in sums of money for its administration. The concept of such banks is not widespread in Germany and is still in its infancy.
- credit Lines
A special form of interest-free loans are framework loans. This is a kind of credit account. Customers can have their money transferred to the current account if required. As with a discretionary credit, the customer only incurs interest for the amounts actually used. Up to a certain limit of the frame loan offer some banks an interest-free repayment. This can only apply in the first year or the entire period of the loan.
- Loans for housing promotion
Some communities give interest-free loans to families who want to buy a flat in the community. Such loans are earmarked and do not leverage private funds or funds raised by a bank, but use the loan to lend public funds. The background is the promotion of immigration to the respective community. The costs of the interest-free loan are subsequently refinanced through taxes.
What are possible pitfalls?
If you want to use interest-free loans, you have to get involved in their conditions. The loans are either earmarked if they serve to finance certain goods, or are granted only with specific terms and for fixed loan amounts. The new customer offers have the goal to generate new customers and to be able to sell them in the long term with interest rates.
Banks, for example, will strive to advertise follow-up loans to advertisers and advertise accordingly. Those who are more likely to use zero-interest loans risk losing track at some point and be unable to repay the debts from the various loans. This can then have a negative effect on the classification of the Private credit.
Some banks charge termination fees instead of interest, require the conclusion of a residual debt insurance or tie the lending to the opening of an account, a building society savings contract or the conclusion of other contracts with the bank. Unrelated loans can not be used for other purposes.
What to do if bad Private credit / credit rating?
Especially in the case of the issue of interest-free loans, the banks check the creditworthiness of customers. The banks ask for data from Private credit or other business information services. If there are negative entries in the Private credit, the bank can refuse to grant the interest-free small loan.
This applies to both earmarked and non-earmarked loans. Customers who have a bad credit rating and therefore receive a rejection of their loan can let someone vouch for the loan. the guarantor then assumes the obligation to pay the installments if the guilty party fails.
Alternatively, some banks accept proof of income as proof that there is regular income, even if the customer has experienced a financial crisis in the past and therefore has a negative Private credit entry. This is especially the case with online banks or online loan offers.
Current figures and interest rate developments
Throughout the euro area, interest rates have fallen in recent years. Germany is one of the countries with the lowest interest rates in Europe. In 2011, customers had to pay an average of 4.5% interest on a loan. In 2012, interest rates were only 4% and in 2013 3.5%. At this level, interest rates stagnated in 2014, with a further drop in interest rates in 2015. In 2016, they were on average 3%.
The interest rate trend follows the falling and rather low inflation for years. The European Central Bank determines interest rates in the euro area. It sets the key interest rate on how much banks themselves have to pay interest if they borrow money from the European Central Bank.
As the US Federal Reserve has slightly raised its key interest rates after a similar period of low interest rates, financial researchers expect a similar development in Europe, which could last for a while.
It is expected that the interest rates of the European Central Bank will remain at a low level for months to years and then be raised very slightly to progressively increase over the coming years. This is especially likely because it is hardly possible to lower the key interest rates any more and the reduction did not have the desired effect of general economic intensification.