Interest-free loan – is such a thing conceivable?

As is well known, the ECB key interest rates have now been at a historic low for about a year. The European Central Bank, in order to stimulate the economy, has decreed for some time that the key interest rate is at 0.0 percent. Thus, banks can now borrow from the European Central Bank for free.

This has led, among other things, to the fact that investors on the one hand hardly still receive interest for their deposits, but on the other hand the credit interest rates have clearly sunk. In the investment sector, some banks are now even starting to charge so-called penalty interest on larger balances. So the investor then pays interest to the bank on his balance, and not the other way around, as it should be. For this reason, among others, some credit seekers ask themselves whether there might even be interest-free loans in the future.

Zero-percent financing already available on the market

Basically, the question of whether interest-free loans are possible can be answered relatively quickly and unambiguously. Already now there is in some areas namely a so-called zero-percent financing. This is nothing more than a loan resp. an installment agreement in which the borrower or the lender is obliged to pay. Buyer does not have to pay interest to lender. So far, however, such zero-percent financing has not been found in the banking sector, but primarily among retailers. From time to time, one can find zero-percent financing – usually as part of special promotions – for example in the following areas:

  • Car dealers respectively. Auto banks
  • Large mail order companies
  • Electronics markets

As you can see from this list, zero-percent financing and thus interest-free loans have been available to date primarily in the commercial sector. The respective salesman would like to induce thereby naturally primarily customers to buy the desired product. Thus, for dealers, any interest gain from financing is only a positive side effect, while for banks, interest income is part of the main business activity and source of revenue. For this reason, such interest-free loans and installment agreements are not yet found in banks.

Relative loans and family loans often interest-free

However, besides the aforementioned merchants and large online stores that now and then make an interest-free loan because of zero-percent financing, loans with no interest payment have been found in another area for many years and even decades, namely in the relatives loan division. In the case of family loans and loans from relatives, it is the case that family members, relatives and very good acquaintances lend money to each other and in many cases do not charge interest on it. It is rather a kind of favor and besides, it is of course morally somewhat reprehensible if you lend money to a family member and want to collect interest for it as well.

However, what many people who use such a relative loan do not know: Such an interest-free loan can become a tax trap. The reason is that if money is lent without interest being paid, the tax office has the presumption that it could be a gift. This, in turn, means that kinship loans could become taxable for the recipient of the money above a certain amount that exceeds the so-called gift allowance. Therefore, especially for large loan amounts, you should first obtain information before using such a kinship loan. If the loan is subject to taxation, it can be expensive despite the fact that no interest is charged.

Interest-free loans at banks: not yet

In the current situation (January 2017), although there are extremely low interest rates on loans overall. However, there are still no credit institutions that have been granted completely interest-free loans. However, this does not necessarily mean that it could not happen in the future, if interest rates remain extremely low, that some traditional credit institutions will also lend money to their customers without charging interest for it.

There is a possible reason why this could happen. In fact, in the meantime, credit institutions must in turn be penalty interest for balances they maintain with the European Central Bank. Therefore, it would obviously be better to reduce excess liquidity, which works mainly through the granting of loans. The logical consequence could therefore be that the banks, to put it bluntly, have to get rid of money, even if it is with an interest-free loan as an additional incentive for potential loan seekers. Whether it will actually come to this, however, remains to be seen for the time being.

Real estate loan tip: Agree higher repayment when interest rates are low

Even if there are no interest-free loans in the field of bank loans yet: Real estate loans now come relatively close to zero-percent financing. The best offers are already below 0.8 percent, which borrowers must pay, for example, for a five-year fixed interest rate in credit interest. The financing is here thus as favorably as never before possible, which brings however also a danger with itself. Indeed, on average, with a standard repayment of one percent and the low interest rates since, it would take you as a borrower more than 40 years to pay off a real estate loan.

Therefore, our tip is definitely that you should arrange a higher repayment precisely because of the low interest rates in the construction loan area. Of course, the overall rate still has to be very affordable, but in most cases borrowers can easily manage an initial repayment of between three and five percent. This makes a lot of difference – also with regard to the later risk of interest rate changes – because then the total term of the loan is reduced from over 40 years (at one percent repayment) to sometimes only just over 20 years.

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