Yes, a no-interest loan is legal, but be wary because no-interest loans could come with deferred interest charges that apply if you don’t abide by their terms. Even borrowing money from a friend or family member without interest could result in tax obligations, so it’s important to approach no-interest loans with caution.
Going to a friend or family member for a loan without interest may seem like a viable option, but keep in mind that the IRS may require your friend or family member to pay imputed interest charges – the estimated amount of interest they should have charged on the loan.
Also, be prepared to pay interest if your friend or family member decides to charge it. Failure to pay back a friend or family member could put a heavy strain on your relationship.
Types of Loans with No-Interest Promotions
- Auto loans: Some dealerships might have promotional 0% auto loan offers, but keep in mind that the promotional interest rate doesn’t last for the entire duration of the loan. These types of loans also tend to have shorter payoff periods and higher monthly payments, but they won’t charge deferred interest like other types of offers.
- Medical loans: Some medical care providers may participate in interest-free loan programs. Just be sure to read the fine print because they could charge a high interest rate if you’re not able to pay the loan back in time.
- Nonprofit loans: Some nonprofit organizations may offer no-interest loans to people who need emergency or temporary assistance. Like the other loans in the list, you could be charged interest if you are not able to pay back the loan on time.
- Retailer financing offers: Retailers sometimes have promotional interest-free offers, but they usually charge deferred interest, so you could end up paying interest on the entire purchase amount if you don’t make the payments on time. These offers differ from the others in the list because they are credit offers and not loans.
If you fail to make payments on a no-interest loan, you could be charged retroactively for interest on the entire loan, so be sure to read the fine print on any no-interest loan offer you may see. You should only consider getting a loan with no interest if you know you can pay the loan off in full and on time.
To avoid the risks of a no-interest loan, you may want to consider other financing options, such as an unsecured personal loan or a credit card that offers a 0% APR introductory period. With 0% APR credit cards not affiliated with a specific retailer, deferred interest is not a concern.
For more information, check out WalletHub’s picks for the best 0% APR credit cards, as well as our best personal loan options. You can also pre-qualify with multiple lenders at once using our free pre-qualification tool.
This answer was first published on 12/13/22. For the most current information about a financial product, you should always check and confirm accuracy with the offering financial institution. Editorial and user-generated content is not provided, reviewed or endorsed by any company.
FAQs
Yes, a no-interest loan is legal, but be wary because no-interest loans could come with deferred interest charges that apply if you don't abide by their terms.
Is it legal to give an interest-free loan? ›
As far as the IRS is concerned, there is no such thing as an interest-free loan. Loans without interest, or at below-market interest rates, are recharacterized so that the lender must recognize market-rate interest income.
Can a loan have a 0% interest rate? ›
Lending institutions offer different loans without interest, including Travel Loans, Business Loans, and Personal Loans. However, even though these loans are interest-free, you must pay the extra charges, origination fees, application costs, prepayment charges, etc.
Is it possible to get a loan without interest? ›
Although you may be able to find a zero-interest personal loan from a traditional lender or credit union, those offers are virtually non-existent. In most cases, you'll have to look elsewhere. Some universities offer interest-free loans to their students for financial emergencies.
Can you give someone a no interest loan? ›
If you lend the money at no interest, the IRS can consider the loan a gift, making you liable for gift taxes. The repayment schedule that the borrower must follow. State whether you'll require periodic payments, a balloon payment or some combination.
What's the catch with interest free loans? ›
Interest-free loans might have additional fees, such as late fees or prepayment penalties, which will impact the amount you have to repay. In some cases, you can avoid those fees. For example, you can avoid late fees by making your payments on time.
What is the $100,000 loophole for family loans in the IRS? ›
The $100,000 Loophole.
To qualify for this loophole, all outstanding loans between you and the borrower must aggregate to $100,000 or less. Under this loophole, if the borrower's net investment income for the year is no more than $1,000, your taxable imputed interest income is zero.
Can a loan have 0% interest? ›
Zero-Interest Loan Basics
As its name suggests, a zero-interest loan is one where only the principal balance must be repaid, provided that the borrower honors the rigid deadline by which the entire balance must be satisfied.
What is a loan without interest called? ›
A soft loan is a loan with no interest or a below-market rate of interest. Also known as "soft financing" or "concessional funding," soft loans have lenient terms, such as extended grace periods in which only interest or service charges are due, and interest holidays.
Do zero interest loans exist? ›
You usually need a very high credit score to qualify for zero interest loans. Zero interest car loans usually come with a higher price tag, expensive extras and strict repayment terms. If you miss even one payment, you lose your 0% interest rate and get charged late fees.
Get It in Writing
- Your name and the borrower's name.
- The date the loan was granted.
- The amount of money being lent.
- Minimum monthly payment.
- Payment due date.
- Interest rate, if you're charging interest.
- Consequences for defaulting on the loan.
Can I loan money to a friend interest free? Yes, you can loan money to friends without charging interest. Having a legal loan agreement does not mean that you are trying to get something out of the borrower, simply that you wish to ensure ensure that both of your intentions are established and respected.
How much money can be legally given to a family member as a loan? ›
How much money can I lend to a family member? Theoretically, you can lend or borrow as much money as you are comfortable exchanging. However, the lender may need to pay taxes on interest earned from loans over $10,000.
Can you legally give someone a loan? ›
You can certainly loan money to a friend or family member, but you should have established repayment guidelines, including interest rates—if any—and a payment schedule, to ensure both parties are on the same page.
Do you legally have to charge interest on a loan? ›
Minimum-interest rules refer to a federal law that requires that a minimum rate of interest be charged on any loan transaction between two parties. The minimum-interest rules mandate that even if the lender charges no rate, an arbitrary rate will be automatically imposed upon the loan.
Is there such a thing as an interest free loan? ›
Can you get interest free loans? Interest free loans don't really exist. However, you could get an interest free loan period when borrowing with a credit card. Some banks may allow for interest free overdraft as well.
