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The lending solutions for businesses have come a long way in offering quick and simple loan approvals. One aspect that many companies continue to struggle with is the ever-climbing interest rates of loans. If you are a woman entrepreneur in India, there’s much to explore and get an interest-free loan or free personal loan.
To promote and encourage women’s entrepreneurship, the government in conjunction with lenders has taken several steps including interest-free loans. Let’s learn about these loans in depth.
What is an Interest-Free Loan?
Interest free-loan or zero-interest loan, as the name suggests, are loans that are offered without charging any interest rate from the borrower. Simply put, if a borrower is eligible for an interest-free loan, they have to repay only the principal amount and nothing else. What borrowers need to understand, however, is that in case they fail to repay the principal amount, the lender is authorised to charge a back-dated interest rate.
For instance: Let’s say you take a loan of ₹5,00,000 for a tenure of 12 months, under the interest-free category. At the end of 12 months, you have to repay only ₹5,00,000. However, if you fail to repay the principal amount i.e. ₹5,00,000 then the lender will charge a back-dated interest rate.
A loan without interest is becoming popular and borrowers can be inclined towards this type of loan as opposed to traditional loans since interest-free loans do not come with the burden of repaying way more than what they borrowed.
Eligibility
Since loans without interest in India are offered to promote entrepreneurship, there are certain specific categories that borrowers need to meet. Let’s take a look at everything you need to know on how to get an interest free loan including eligibility criteria, document requirements and the application process.
● Eligibility Criteria: To get an interest-free loan, the applicant must possess:
● Indian citizenship
● Age requirements as specified by the lender
● A decent credit score
● High repayment capacity
● Documentation Needed: Here’s a list of documents that borrowers must keep handy:
● Documents of business ownership
● Documents showing the credit flow of business in the last five years
● Audited business accounts and record book
● Any other document as the lender may demand.
● Application Process: To apply for an interest-free loan, the borrower can visit the nearest branch, fill in the loan application form along with all the documents required and wait for verification and approval.
Is It Really Interest-Free?
A zero interest loan in India appears an appealing opportunity but before applying it is crucial to understand every aspect of this type of loan. Let’s begin by evaluating whether or not this type of loan serves the purpose of being interest-free:
● Firstly, borrowers need to understand that though they are applying for an interest-free loan, they will be charged additional fees like application fees, processing fees etc. This amount is deducted from the loan amount which again puts borrowers in a situation where they have to repay more than what they borrowed.
● Secondly, as discussed above borrowers can enjoy the benefits of an interest-free loan only till the time the principal amount is repaid in time. In case of a default, the lender has the right to charge a back-dated interest rate on the principal amount.
Advantages of a Loan Without Interest
Despite its minor drawbacks, interest-free loans are popular amongst women entrepreneurs and other business owners as this type of loan offers multiple advantages:
● Instant Approval: One of the biggest advantages of interest-free loans is that they are approved instantly and the borrower gets the sanctioned loan amount in their account quickly as compared to traditional loans.
● Accessible to MSMEs: Micro, small and medium enterprises, especially those run by women entrepreneurs, can easily get access to capital through interest-free loans and repay as they make a profit. Know that many lenders require minimum documents and a simple verification process for women entrepreneurs.
● Fulfills the Need for Instant Funds: Women entrepreneurs running MSMEs need instant funds to perform everyday business activities and this is where an interest-free loan helps. Borrowers can borrow significant amounts frequently till the time they are repaying in time.
To make the most of interest-free loans, borrowers must keep these tips in mind:
● Be mindful about the loan tenure.
● Choose a loan amount that can be repaid easily.
● Utilise the loan amount smartly to generate enough credit for repayment.
● Carefully evaluate the back-dated interest rate that can be charged in case of a default.
Disadvantages of a Loan Without Interest
Before applying for an interest-free loan, borrowers must evaluate both sides of the coin. Here are certain risks and drawbacks of interest-free loans that must be assessed smartly:
● Easy Accessibility Leads to Borrowing Habit: As discussed above, interest-free loans are easily accessible i.e.borrowers can clear verification and get the loan sanctioned instantly. This might appear as an appealing window but can be detrimental for those who are not efficient at managing credit.
● Default Increases Financial Burden: Borrowers who can easily repay the loan amount can benefit from this type of loan. However, in case of a default, borrowers have to face a grave financial burden since the interest charged by the lender, in case of a default, is back-dated.
● Interest-Free Loans have Limited Usage: Another drawback of interest-free loans is that this type of loan is available only for specific needs that might not be ideal for women entrepreneurs looking to expand.
Borrowers who find interest-free loans appealing but are sceptical about the drawbacks can consider alternative options. For instance: There are multiple options in lenders who offer competitive interest rates without demanding collateral/security thus helping borrowers without creating financial burden. Additionally, under this type of loan borrowers can plan their finances better.
Minimum Credit Score Required
Remember that to enjoy the benefits of interest-free loans, borrowers need to have a good credit score. Here’s everything women entrepreneurs need to know about credit scores for interest-free loans:
● Importance of Good Credit Score: Borrowers with good credit scores get to enjoy certain additional benefits like:
● Higher Credit Limits: Borrowers with good credit scores build trust in the eyes of lenders which helps them get higher credit limits i.e. higher chances of getting the desired loan amount.
● Quick Loan Approvals: A good credit score pushes the loan verification and approval process since lenders rely heavily on the borrower’s credit score.
● Access to Desired Lenders: A good credit score gets the borrower access to desired lenders which plays a vital role in a smooth credit flow for the business.
● Average Credit Score Requirements: The average credit score requirement varies depending on the lender and borrower and must be checked while applying for a loan.
● Tips for Improving Credit Score: Borrowers looking to get financial aid must work to improve their credit score. Let’s take a quick look at tips to improve your credit score:
● Choose Credit Smartly: In today’s time when there are multiple lending solutions available it is important to choose a lender and credit smartly without getting trapped in unreasonable credit.
● Repay Loan in Time: Avoid being a defaulter as this impacts the credit score significantly.
● File Income Tax Returns: Filing income tax returns helps build a good credit score.
● Avoid Being Guarantor: Borrowers looking to get a loan sanctioned in future should avoid being a guarantor for others to avoid getting their credit scores impacted, negatively.
Frequently Asked Questions
- What is an interest-free loan?
An interest-free loan is a type of loan where the borrower has to repay only the principal amount instead of repaying loan amount along with interest-rates.
- What are the advantages of interest-free loans?
This type of loan is beneficial in multiple ways: promises instant approval, reliable for women entrepreneurs looking for cash flow, eases financial planning etc.
- What are the drawbacks of an interest-free loan?
Applying for an interest-free loan comes with certain drawbacks like the excessive processing fees that is added to the loan amount and back-dated interest rate in case of a default made by the borrower in repaying the loan. Additionally, this type of loan is available only for specific purposes.