There are many kinds of loans freely and easily available in the market. Each loan is granted keeping a specific purpose in mind. However all these loans involve monthly installments as mode of repayment .These monthly installments comprise of both the principal as well as the interest component. This is where the interest only loan comes into play. An interest only loan is a unique kind of loan. In an interest loan, the borrower needs to pay only the interest component each month as installment. As a part of principal is not being repaid monthly, the amount of monthly installment in interest only loan is far less than other traditional types of loan.
In case of an interest only loan, for the first 3 to 4 years, the borrower only pays the interest. As a result the principal amount lent remains intact. From the fifth year onwards, the borrower is required to pay both the interest as well as the principal component like other traditional loans. This is when the borrower starts to feel the burden.
Such kinds of interest loans are mainly availed by 2 categories of people. Firstly, those who know that with the passage of time their earning capacity will increase. They anticipate that at the end of the 5th year horizon, they would be in a position to earn sufficient amount of money to service the increased monthly installments. Secondly, interest only loans are taken by those who purchase a house with it and at the end of the 3rd year sell it off. Uses the proceeds of sale to repay the loan fully and take a new loan to buy a new house.
Interest only loans are gaining popularity across the globe. People resort to such loans as they like the idea of paying less in the first three or four years. They also save money in the initial years that can be used to repay the loan sooner. Ideally, the borrower is in a win situation if he takes an interest only loan and repays the principal taken at the end of the interest only period. Moreover, all those who do not have a high or set pattern of income can resort to interest only loans for the time being.