Interest-Only Loan
A financing arrangement where only interest is paid initially, principal later.
Detailed Description
Interest-Only Loan
What is the primary benefit of an interest-only loan?
The primary benefit is lower initial monthly payments, which can improve cash flow for borrowers.
What happens after the interest-only period ends?
After the interest-only period, borrowers must start repaying both principal and interest, often leading to higher monthly payments.
Who typically benefits from interest-only loans?
Real estate investors and individuals with variable incomes who expect future income increases often benefit from these loans.
What are the risks associated with interest-only loans?
The main risks include payment shock when the loan transitions to amortization and the lack of equity build-up during the interest-only phase.
How do interest-only loans affect credit scores?
Timely payments can positively impact credit scores, while missed payments can harm them; also, not reducing principal may keep credit utilization high.