Search by Keyword
Interest-Only Loan
Explanation:
Many loans allow you to sign up for an interest-only payment option at the time you take the loan out, giving you the freedom to either make a full payment -- both interest and part of the principal -- or pay only interest in any given month. Interest only-loans tend to have higher interest rates than conventional loans given the increased risk they represent for lenders. The higher rate, coupled with the fact that it takes longer to pay off a loan when only paying interest during certain months, means interest-only loans also generally wind up being more expensive for borrowers in the long run.
This type of payment structure is helpful for consumers who may not be able to truly afford a purchase at the time they make it but expect their financial situation to change in the near future.
Our Thoughts:
Interest-only loans are extremely risky given that you are essentially betting either your home or car (interest-only options are usually found on mortgages and car loans, both of which are secured by the property they're used to purchase) on the fact that you will have more money than you do now in the very near future. The best approach to taking out a loan is to ensure you can afford its monthly payments even if things do not go as planned.