What are interest-only loans?
5 minute read
December 28, 2020


If you want to buy an expensive home, or want to invest in a big business, do a partnership, or become a shareholder with someone, then the interest-only loans are suitable. In this article, you will find out what interest-only loans are and how they can help you achieve your right goal, like making a big profit in a short time.


The interest-only loans are the loan that a buyer has to pay interest on the loan in a fixed time. He does not need to pay the principal amount of the payments. In this way, the buyer can easily pay the installment in a lower amount in a fixed period. Besides, in this type of loan, the borrower is free to decide whether he wants to pay the loan as a lump sum amount or either want the installment in a higher amount, including the principal amount and interest rate. The decision is all dependent upon the customer. The range of the terms is about 1 to 5 years maximum.

Key points about interest-only loan

Some of the important key points are as follows:

  • In this type of loan, the payment that a buyer maintains is enough alone because they can easily cover up the interest rate on loan.
  • A buyer has to pay low payments monthly, which are much less than the standard ones.
  • You can easily buy an expensive home or property with this type of loan, but you are at risk.
  • The interest-only loan is of worth only if a borrower has managed its principal amount first that he needs to pay for higher payments.

Working of Interest-only loan

As you all know, in this type of loan, you have to pay low payments monthly than the standard ones because, in the standard loans, a buyer has to pay the same amount of interest and loan balance at a specific time, which is called amortization.

If you are keen to calculate the monthly payments on this type of loan, you have to multiply the balance with the loan’s interest rate and divide the value by one year, or you can say 12 months. You will get the monthly payments on an interest-only loan.

Consideration of Interest-only loans

The buyer who wants to borrow this loan is as follows:

  • The people who have a keen desire to have an expensive home.
  • Those who can easily afford more than one home.
  • The borrower has an idea that the home may be sold out in a specific period.
  • If the borrower has full confidence, he can deal with the rise in the monthly payments and easily maintain them.
  • The buyer that invest anywhere else and deal significantly with the higher rates.

Types of interest-only loans

Interest-only loans are part of subprime loans. The commons types of interest-only loans as subprime loans are as follows:

Optional Adjustable-rate mortgage loans

They give the customer the full right to choose which type of monthly payment they want for 5 years.

Balloon loans

In this, the customer has no choice but to pay all the loans in 5 to 7 years.

No-money-down loans

In this type, a buyer gets the loan to pay the fixed down payment of the mortgage.

Negative amortization loans

You subtract these from every principal amount paid by the borrower.

Most of them are destructive, due to which they are no longer available in the market.

Pros of Interest-Only Loans

An interest-only loan provides many privileges to the borrowers. Some of them are as follows:

  1. If you want to buy a home or property, then you have to pay less monthly payments on this loan type.
  2. A borrower can easily qualify for this type and get a large amount to buy a big and expensive home in some classy area.
  3. A borrower has to place a specific and high amount and invest with this amount to make a big net worth.
  4. Within the interest-only time, the customer has to pay the tax because this term is tax-deductible.

Cons of Interest-Only Loans

While taking this loan, you have to research the cons and risks related to interest-only loans. Some of the common cons are as follows:

  1. If you are planning to get a high income, then you are wrong. You can’t get the income very rapidly as you have planned.
  2. Many customers do the wrong thing and ignore investment. They pay more attention to spending money.
  3. If a customer takes an adjustable-rate mortgage, this is a big risk for the borrower because the rates rise.
  4. Some people can easily afford the principal amount, but some cannot pay and afford the principal amount and high monthly payments.
  5. Sometimes a payment becomes shocking for the buyer if they will not manage their budget and cannot afford the high payments.
  6. Some lenders charge a penalty on the prepayment of the loan. So keep a check on this.
  7. Refinancing the loan may be difficult for the customer.


Interest-only loans are best for people who have a full idea about what they want and how they will manage their money. If any borrower is not sure that he can afford interest only with high monthly payments, then go for another option. You have the full right to decide according to your requirements.

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