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Most lenders charge interest on loans to make lending worth their while. It also helps mitigate financial risk in case the borrower defaults on their payments. But interest doesn't always have to be a factor in borrowing money. There are ways to sidestep these fees and save money in the long run—you just have to know where to look.
It's possible to finance interest-free purchases with eligible credit cards, personal loans and other outside-the-box solutions. Here are five ways to avoid paying interest.
1. An Intro 0% APR Credit Card
Credit cards have notoriously high interest rates. The average APR is 16.3%, according to May 2021 data from the Federal Reserve, with some cards charging an interest rate far above that. But there are also cards that don't charge any interest at all for a limited period of time. Exploring a 0% intro APR card can unlock short-term, interest-free financing. These types of credit cards deliver exactly what the name implies: New cardholders are granted an introductory period during which interest does not apply to the balance of the purchase. As long as the balance is paid off by the end of the 0% APR period, you can avoid paying interest entirely. One thing to know, however, is that you'll still be required to make at least the minimum required payment each month.
If your card still has a balance at the end of the promotional period, it'll begin accruing interest at whatever the card's standard APR is. This timeline can vary from card to card, but it's possible to get no-interest financing for up to 21 months. Experian's card comparison tool is a good jumping-off point that provides personalized offers based on your credit profile. From there, you can compare 0% APR cards to get the best deal.
2. Buy-Now-Pay-Later Services
Installment payment services are becoming increasingly popular, especially when it comes to online shopping. These companies allow you to break a large price tag into smaller, fixed monthly payments over a predetermined time period. You'll generally avoid interest as long as you make your payments on time each billing cycle.
The right buy-now-pay-later service will depend on the type of purchase you're making. Furniture stores, for example, are known to offer interest-free financing for a certain amount of time. Just be sure you structure your payments so that you'll pay off your balance before the intro period ends. Otherwise, you could be slammed with high interest fees.
3. A Loan From Family or Friends
Borrowing money from a supportive friend or family member can be a viable option if you know someone with means who can lend to you. The initial conversation may feel uncomfortable, so be sure to put the other person's feelings first so they don't feel like you're taking advantage of them—which could damage the relationship.
Approach them with a clear request that outlines how much money you need, what the money will be used for and your intentions for paying it back. This should include details down to your proposed monthly payment amount and repayment timeline. You can ease their concerns by putting the agreement in writing with a loan contract. Only borrow if you're confident you can pay it back over a time period that both parties feel good about. If, for some reason, you do struggle to make a payment, be upfront with them to hopefully avoid hurting the relationship.
4. A No-Interest Loan
Depending on what you're financing, you may be able to find a 0% interest loan. For example, some car dealerships offer interest-free auto loans on certain new cars. Just bear in mind that these types of financing deals are generally reserved for those with outstanding credit—a FICO® Score☉ of at least 740.
Auto loans aside, you may also qualify for interest-free medical financing. If you're up against an expensive medical bill, see if you can make fixed installment payments to the medical provider instead. It depends on the provider, and some may require a down payment, but it could be worth asking.
5. Your Emergency Fund
One of the best ways to avoid paying interest is to borrow money from yourself. Enter the emergency fund. This is a pool of money you set aside in a savings account to hopefully see you through any unexpected financial emergency that pops up. You can draw on these funds, then replenish your account once you're back on your feet.
Most experts recommend saving three to six months' worth of expenses in your emergency fund. You can make it a line item on your budget and automate your monthly contributions. It's a great alternative to, say, borrowing from retirement accounts, which can deplete your long-term wealth and set back your retirement plans. If you fail to repay a 401(k) loan on time, it will count as a regular distribution. That means you'll be taxed on that money and be charged a 10% penalty if you're under 59½.
The Bottom Line
If you're looking to secure a 0% APR credit card, or a no- or low-interest loan, a strong credit score will likely be your best resource. Taking steps to improve your score can help you qualify for better financing options. Experian Boost®ø is a simple way to give your credit score a lift. It adds bills that wouldn't otherwise appear on your Experian credit report so the payments you've made can factor into your scores.