Interest-Free Loans: BNPL’s Hidden Benefit - Cushion (2024)

Interest-free loans have been around for a while, but they’ve been mostly limited to people with high credit scores. They’re also often used for long-term financing of big purchases like cars or luxury goods.

Buy Now, Pay Later has disrupted all that though by introducing a 0% installment loan for small purchases that anyone can apply for.

Traditional interest-free loans can also be leveraged to create various financial opportunities. This means, BNPL can also be used in the same way. Essentially leveling the financial playing field.

0% Interest Loans: What Are They?

There are three main types of 0% interest loans:

1. Deferred Interest Loans
2. 0% Intro APR Credit Cards
3. Buy Now, Pay Later

Deferred Interest Loans

Deferred is a fancy way of saying postponed or delayed. So you can tell that financial institutions that offer these loans expect to get paid interest eventually.

In fact, these loans actually accrue interest despite being called 0% interest loans. You just don’t have to pay that interest if you pay the installments on time until the debt is paid off.

Financial institutions count on the percentage of people who default or miss payments in order to make money from these loans.

0% Intro APR Credit Cards

These credit cards are similar to deferred interest loans but they’re generally much safer. Just like deferred interest loans, these credit cards will start charging interest if you miss a payment.

However, you won’t have to retroactively pay interest for the previous billing cycles. If you do miss a payment, you’re going to have to pay interest on your current balance but the previous billing cycles would still be at 0% interest.

Even if you make all your payments on time, the 0% APR isn’t permanent. It only lasts during the set introductory period, which is usually 15-21 months. After that period, these cards will start charging interest.

Buy Now, Pay Later (BNPL)

BNPL providers offer pay-in-four plans at 0% interest. The installments are usually bi-weekly but some providers even offer monthly installments.

Some BNPL plans can also be paid in more than four installments. However, most of these plans charge interest rates of up to 36% APR.

Leveraging 0% Interest Loans to Make Money

Investing a Zero-Interest Loan (Carry Trade)

In February 1999, the Bank of Japan set its interest rates at 0% to combat deflation. Japanese housewives, collectively dubbed “Mrs. Watanabe” by financial analysts, saw this as an opportunity to make more money.

They borrowed Yen from Japanese banks and used that money to invest in foreign currency. By investing in a foreign currency with high-interest rates, a flower arranger in Tokyo managed to earn 400 million Yen from her investments!

Of course, like all investment strategies, carry trade has its risks. In fact, the Mrs. Watanabes of Japan lost a lot of money during the Russian Financial Crisis. And since carry trades use borrowed money as capital, the financial impact of a failed investment is much greater.

Stoozing: Investing with 0% Intro APR Credit Cards

Stoozing follows the same principle as carry trades but it leverages 0% Intro APR Credit Cards instead of low-interest loans.

Stoozing is done by using your credit card to pay for whatever you need and then investing the same amount of money into an investment vehicle of your choice. This means that this strategy requires you to have high credit utilization, which is bad for your credit score.

But the biggest downside to stoozing is the limited time frame in which the credit cards have 0% interest. However, savvy investors have found a workaround for this. By transferring their credit card balance to a new 0% Intro APR Credit Card they can essentially extend the 0% interest timeframe indefinitely.

Aside from the usual risks associated with investing a loan, stoozing also exposes investors to the risk of not being able to transfer their balance to a new credit card.

After all, their application can be rejected, or they could run out of 0% Intro APR Credit Cards to apply for. If this happens, then they’ll end up with a massive balance that they have to pay interest on.

BNPL Used for Carry Trade or Stoozing?

If pay-in-four BNPL plans have 0% interest, wouldn’t it be possible to apply the strategies above to a BNPL loan?

Yes! BNPL can be leveraged to increase your Return On Investment (ROI). And the process to do so is almost identical to stoozing. Finance your purchases using a 0% interest BNPL loan, then invest 75% of the price of your purchase into an investment vehicle of your choice (you usually have to pay 25% upfront).

While this strategy isn’t as popular as carry trades or stoozing, there are quite a few investors who are capitalizing on this.

In fact, according to the Consumer Financial Protection Bureau’s (CFPB) March 2023 Making Ends Meet Survey, “9 percent of consumers with incomes above $200,000 annually and 12 percent of consumers with incomes between $125,000-$200,000 borrowed at least once using BNPL financing” in 2022.

It’s either these high earners are bad at managing their finances, or they are leveraging BNPL to increase their ROI.

How BNPL Levels the Financial Playing Field

While zero-interest loans can be leveraged to increase your investments, not everyone can do so. A FICO score of at least 740 is needed to qualify for most of these loans. The same can be said for 0% Intro APR Credit Cards.

BNPL on the other hand is available to almost everyone. Even those with bad or nonexistent credit can get approved for a BNPL loan. This aspect of BNPL is a double-edged sword. The accessibility of these loans can lead to financial overextension.

However, if used wisely, it can also be a great way to increase the amount of money you can invest. And by being the only 0% interest loan that’s accessible to people with bad credit, it could potentially be their way out of the debt trap.

FAQ

Is it possible to get an interest-free loan?

Yes, but most of these loans require you to have a high credit score to qualify for them. The exception to this is Buy Now, Pay Later (BNPL)

What credit score do you need for 0 interest?

A FICO score of at least 740 is needed to qualify for most zero-interest loans.

Are interest-free loans always a good idea?

No, most of these loans revert to normal interest rates if you miss a payment. So only apply for them if you’re sure that you can make the payments on time.

What happens if I can’t repay an interest-free loan on time?

They will start charging interest, late fees, or both.

Conclusion

BNPL levels the financial playing field by being the only 0% interest loan that’s available to people with bad credit. With enough know-how, aversion to impulse purchases, and proper management of payments, BNPL can be leveraged to increase the amount of money you can invest and potentially be your way out of the debt trap.To ensure that you don’t miss any of your BNPL payments, try the Cushion App! Your one-stop shop to manage and pay your BNPL payments. As a bonus, Cushion also allows you to build your credit history with the payments you’re already making.