Interest Only Loans

2007-03-08 10:33:40

( Financial )



Loans in General
Loans are contracts that involve a lender and a borrower. The lender will give money to the borrower, who will promise to repay it at a later time. Commercially transacted loans usually involve the payment of interest and the provision of collateral. Collateral can be any property that will stand as security for the repayment of the loan.

Interest Only Loans
Interest only loans are loans that provide for the payment of the interest during the period of the loan. The entire principal will not be due or demandable until the period of the loan ends. A very large interest only loan is called an interest only jumbo.

An Illustration of the Interest Only Loan
If you loan one million dollars through an interest only loan, you will only be asked to pay the interest during the period of the loan. Let's say the interest amounts to four thousand dollars a month. For the whole period of the loan, you will only be paying four thousand dollars each month. But when the period ends, you will be required to pay back the entire one million dollars. An interest only loan thus allows you to use more of the money you borrowed during the term of the loan. However, it also requires you to be prepared to pay back a very large amount at the end of the period.

Tools to Help You Repay an Interest Only Loan
An interest only loan can be difficult to repay if you do not have a system to help you save money for repayment. One such system is provided by an endowment policy. An endowment policy mixes life insurance with savings. When you pay for an endowment periodically, it uses some of the money to build up a fund. With proper computation, you can set up a plan to pay endowments that will yield the exact amount of the loan (or more than the amount), at the precise moment your loan principal becomes due.


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