Interest Only Loans

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Interest-only loans are a specific type of loan that only requires borrowers to pay interest on the total borrowed amount. Many types of loans, such as mortgages, require borrowers to pay interest as well as a percentage of the principal in each payment in order to keep the loan in good standing. Since interest only loans only require the borrower to only make interest payments, the monthly payment is often much lower than that of a traditional loan. This makes interest only loans ideal for individuals who are facing sudden economic hardship as a result of financial emergencies such as the loss of a job. However, before you enter into an interest only loan, it is important to consider both the pros and cons of this type of a loan. It is important to ensure that you are taking out an interest only loan for wise reasons, and not just because it enables you to spend a larger amount.

Advantages

As previously mentioned, one of the greatest benefits of interest only loans is that they lower your minimum monthly payments. If a borrower is considering an interest only loan to purchase a home, it will enable them to buy a more expensive home with lower monthly payments. Lowering your monthly financial obligations can be beneficial to individuals who either have excessive debt, or those who are temporarily unemployed. If you also have variable income that is not always a consistent amount, interest only loans will allow you to pay a lower amount when you are earning less income, and a larger amount when you are earning more income. This can be extremely beneficial to seasonal workers who are able to pay down a portion of the principal during busier seasons.

Another benefit of interest only loans is that it allows borrowers to create a personalized amortization schedule. If your financial circumstances change for the better, you are able to decrease the amortization on your loan.

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Disadvantages

One of the most often cited criticisms of interest only loans is that they do not allow the borrower to build equity. If you make the minimum monthly payments, you are merely making interest payments without paying down the principal. Deferring any payment on the principal does not allow you to build personal wealth. This will also prevent borrowers from being able to take out a second mortgage at a later time.

Another pitfall of interest only loans is that you may be stuck with a loan that is greater than the value of your home if it decreases in value. This means that you may be in a position further down the road where you will need to refinance your mortgage to pay off the debt. While you may wait until your house increases in value again, this may never happen. Instead, it could keep decreasing in value which will make the problem worse. In addition, many banks will require that you pay the principal amount back in full by a certain deadline, for example 10 years.

Calculators

Before committing to an interest-only loan, it is wise to calculate your monthly payments on an interest only loan and compare it to the payments that would be required under a traditional loan. If your calculated monthly payments on a traditional loan are manageable, than it is generally a better investment decision than an interest only loan. If you are searching for an interest only calculator online, be sure to choose one that is appropriate for your geographical location. Since each country has different interest rates, be sure to choose one that represents your geographical location.

Below are some examples of good interest only calculators:
Interest Only Investment Loan Calculator
Fixed Vs Interest