Are Interest Free Loans Really Free?

Oct 17, 2016

If you ever see a loan advertised as interest free, it is understandable that you would find such deals attractive. While these loans might seem attractive at face value, and generate a lot of interest and enquirers from customers, is there really such a thing as an interest free loan?

When You See an Interest Free Loan Advertised

While an interest free loan might well be interest free in terms of interest applied to the overall loan balance, you’re going to pay for the loan somehow. Loans that are advertised as ‘interest free’ will usually have a ‘merchant fee’ applied, which you repay along with your loan balance each month. In such cases, the interest rate equivalent will have been built into the so-called merchant fee, meaning the finance element itself is not actually free.

In comparison, loans that aren’t ‘interest free’ may still have different fees and charges that are applied, however these will be built into the actual comparison rate you are given when you apply for and accept the loan.

Another potential problem with ‘interest free’ loans is that they can be inflexible regarding making additional payments or repaying the loan off in full earlier than the loan schedule. This is a common source of additional fees with such loans, and can quickly mean you would have been better off accepting a regular loan, even if the interest rate seemed unattractive at first.

Know What You’re Being Offered by Comparing Your ‘Interest Free’ Deal

Let’s now take a loan advertised as interest free and a loan advertised with an interest rate and show you how to compare the two as you try to make a decision.

  • Loan A – Borrow $25,000 over 5 years
    Actual Comparison Rate: 18.66%
    260 weekly repayments of $147.84 per week
    Total to repay $38,438.40

  • Loan B – Borrow $25,000 over 5 years, interest free
    Merchant Fee: 20% of the outstanding balance
    260 weekly repayments of $165.59 per week
    Total to repay $39,741.00 plus any additional charges applied

Some loan providers might provide a lower merchant fee upfront but then lock you into additional charges throughout the loan term, thus increasing their earnings from your account.

The main thing to remember with this example is that, in most cases, loans such as that shown in loan A will include all administration fees and charges within the actual comparison rate. The only additional charges you are likely to incur with such loans is if you have to pay an extra fee should you want to make an extra payment or repay the loan in full. However, those charges will still apply in the example of loan B.

To get a further idea of how companies offering loans such as B above are charging you, speak with lenders you are considering applying for a loan with and asking about their fees and charges schedule. They will then explain how these are absorbed into the actual comparison rate but also provide a specific breakdown of what you’re paying for.

Other ‘Interest Free Credit’ Deals

As well as loans, credit cards, store purchases, and other types of credit are often advertised and packaged as being interest free.

In these cases, interest free usually only applies for a specific promotional period. After the promotional period has ended, interest will be applied, and the rate will often be much higher to compensate for the 0% rate earlier. Some credit cards and store cards even offer deals where you don’t have to pay anything for a specific period of time, alongside a 0% interest deal. For example, you could open a new credit card that is advertised as 0% interest for six months, as well as pay nothing for six months. If you aren’t switched on when it comes to managing your finances, you might look at this and think you can save a fortune by not repaying anything over six months. However, after six months the high interest rate is suddenly going to kick in, and you’ll have missed the opportunity to clear your balance before this happens.

As with personal loans that are ‘interest free,’ such products will usually also have an additional schedule of high charges and fees, and be very inflexible, as a counterbalance for no interest being applied.

Ensure You Aren’t Caught Out

We understand how easy it is to be taken in by attractive looking offers such as ‘interest free,’ be it on a loan, a credit card, or any other type of finance or credit product. However, by looking closer at what is being offered, you will usually identify that the ‘interest free’ deal could end up costing you a lot more than if you just chose a product that applies a regular interest rate. The only exception would be if you use a 0% credit card and ensure the balance is cleared before the end of the promotional period, however you would need to make sure you are set up to manage your finances well to ensure you don’t get caught out with these.

If you are considering a MacCredit personal medical loan and want to know how much of your interest rate is made up of administrative fees and charges, call us now on 1300 884 355.

Disclaimer:  This article contains general comments and recommendations only.  This article has been prepared without taking account of your objectives, financial situation or needs.  Before taking any action you should consider the appropriateness of the comments made in the article, having regard to your objectives, financial situation and needs. If this article relates to the acquisition, or possible acquisition, of a particular credit product you should obtain and consider the relevant disclosure documents before applying for the product.

WCF Medical Pty Ltd - Suite 104 Level 1, 30 Cowper Street, Parramatta NSW 2150

ACN 609 032 242 - Credit Representative 484002 is authorised under Australian Credit License 389087


Approved customers only. Terms, conditions, fees and charges apply. All applications are subject to our lending panel’s lending and approval criteria. Settlement times may vary depending on circumstances. Loan repayment terms range from 18 months to 7 years. Interest rates range from 7.65% p.a. (7.65% p.a. comparison rate) to 29.99% pa (31.13% p.a. comparison rate) for unsecured loans, and from 8.95% p.a. (10.56% p.a. comparison rate)  to 29.99% p.a. (31.13% p.a. comparison rate) for secured loans.
Comparison rates are based on a loan of $30,000 over 5 years.
WARNING: This comparison rate is true only for the example given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. Rates are subject to change.
EXAMPLE: An unsecured personal loan of $30,000 borrowed for 5 years with the interest rate of 7.45% p.a. (9.07% p.a. comparison rate), would estimate to a minimum total amount payable of $37,741.60 via the weekly payment option (including a $495 establishment fee and $13 per month administration fee). Rates are subject to change.