When a person takes out a loan, he is generally required to pay interest on the principal of the loan. This interest is calculated as a percentage of the total loan amount and is assessed over a specific period of time. For example, a loan may carry an annual interest rate of 5 percent. "Interest-free" credit is a type of loan that does not carry any interest.
Loans
When a person takes out a loan, he will generally agree to pay back the loan over a specific period of time. In most economies, money loses value over time due to inflation. To compensate the lender -- and often to allow him to earn a profit on the loan -- the lender will charge the borrower interest on the loan. Loans without interest, therefore, result in the lender losing money.
Zero Percent Interest
Some parties will offer a loan at zero percent interest, meaning there is no interest charged on the loan at all. This can happen for various reasons. For example, a person may not charge his friend interest on a loan. Or, the lender may choose to charge the person a flat fee for the loan, meaning that, although the borrower is paying for the loan, he is not doing so in the form of interest.
Warnings
Many companies that advertise zero percent interest rates on loans may reserve the right to raise the interest rate under various circumstances. For example, on many credit cards, the finance company that issued to card is legally allowed to raise the interest rate on the card if the borrower defaults on a payment. In other cases, the loan is only temporarily free of interest.
Credit Cards
Many times, zero percent interest is offered as an introductory rate on credit cards. For example, the company that issued the card may allow the person to pay no interest on his loans for a first year. However, the person will be required to make a minimum payment on the loan. And, after the introductory rate has expired, the person will be required to pay a much higher rate of interest.
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