When you take out a loan from the bank, you have two options when it comes to the repayment period—interest only or principal and interest. While both of these types of loans can be good for your financial situation, it’s important to look at the interest-only loan and the principal and interest loan side by side before deciding which one you’d like to go with. Here are some of the pros and cons of each option that might help you make up your mind about which type of loan will be best for you.
What is an interest-only loan?
An interest-only loan is one in which only your interest is paid every month until you have paid off enough to pay off your principal as well. This typically takes place over a fixed period of time (usually 5 years) and then you must start paying both principal and interest.
What are principal and interest loans?
With a conventional loan, your monthly payments consist of two parts: interest on how much you owe and principal that reduces your remaining balance (principal is also called the balance). For example, if you took out a $400,000 loan at 5% interest with a 30-year term, you would make monthly payments until the debt was paid off.
How do I know if an interest-only loan will help me?
If you plan to use money from your loan to invest in property, or if you expect that your income will increase steadily over time, then an interest-only loan may be a smart choice for you. This will allow you to maximize your monthly budget while you slowly pay off your principal balance.
Just remember that these loans typically require higher interest rates because lenders are taking more risk on these types of loans—if not done properly, paying interest only can lead to massive credit card debt in a very short period of time!
Should I get an interest-only loan?
There are many reasons why you might want to finance a home or another property with an interest-only loan. It’s often used by those who have significant equity in their homes, are young enough to be able to pay off their loans before they expire, or by individuals purchasing a vacation home who won’t live there all year round.
If you can afford an interest-only loan, it’s definitely worth considering as it could potentially save you thousands of dollars over its lifetime.