Interest Only Loan
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Interest only loans, as the name implies, allow a borrower to pay only the interest on the loan for a fixed amount of time. At the end of the fixed period, the borrower either pays off the total obligation in one payment, refinances, or starts paying off the principal. An interest only loan is beneficial because it can provide the lowest possible payment per month. However, only a select number of people should even consider this funding because of the risks associated with it.
The person who would most benefit from taking out an interest only loan would be a businessman such as an executive. This person would benefit from making bonuses or other large sums of money throughout the year but have other months throughout the year where he or she earns a moderate salary. This way the person would benefit from lower monthly payments and be able to pay large amounts when his or her bonus time rolled around. Another person who might benefit from interest only loans is one who does not have a predictable salary, or even one who expects to earn a lot of money within a few years.
There are a few advantages and many disadvantages about this financial program. One advantage is that interest only loans offer flexibility, meaning someone can take out a loan at virtually any price they want. This also allows the borrower better purchasing power. An interest only loan allows for lower monthly payments. However, the disadvantage kicks in when the term is over and the borrower has to start paying on the principal. Payments rise dramatically and if one is not prepared financially, they could be in a great deal of trouble. This type of funding program also does not necessarily provide a lower interest rate. In some cases, a lender might charge a higher rate because of the risk associated with this service. A final disadvantage is if one is not careful and does not calculate the cost of this type of funding compared to a standard lending program, they might end up spending more money.
Lenders today see that an increasing group of people who take out interest only loans are young people rising successfully in the business world. These young people want to immediately buy all that wealth can buy - a big house, a fancy car, and anything else they can get their hands on. Proverbs 13:11 says, "Wealth gotten by vanity shall be diminished, but he that gathers by labor shall increase." The lesson to be learned here regarding an interest only loan, especially for Christians, is to decide whether it is a good financial route for one to take (for example in buying a home) or just a means to build a world of material goods.
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