An interest only loan is when the borrower only pays interest on a borrowed amount in monthly payments for a fixed term. At the end of the term, which usually lasts from five to seven years, the borrower must refinance, pay the balance in a lump sum, or start paying the principal. These loans are mostly intended for affluent borrowers, including those who have income in the form of infrequent commissions or bonuses, who expect to earn a lot more in a few years, or who will invest the savings on the difference between an interest-only loan and an amortizing loan and are confident that the investments will make money.
Financial advisers do not recommend interest only loans to regular wage earners who take out moderate-size loans and do not have a strategy for investing the savings. A typical interest only loan would have an interest rate of around seven percent and provide borrowers with a lot of flexibility. However, the flexibility comes with a price, and interest only loans can become expensive and prevent people from paying down their principal.
Who it’s for
Interest only loans are for affluent borrowers. The ideal borrower would be an executive who earns a modest salary and whose main income is from bonuses once or twice a year. The interest only loan provides the lowest possible monthly payment for the lean months and allows the executive to pay down big chunks of principal when bonus time rolls around. Business owners with unpredictable incomes also might benefit.
What you will need to secure this loan
In order to obtain an interest only loan, interested applicants will need to contact a local lending institution and inquire about the different options and rates available. Personal and financial history, including a credit report, will need to be made available to the lending institution.
