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Understanding Interest Only Loan Payments

When it comes to borrowing money, there are a variety of loan payment options available. Interest only loans are one such option. However, before deciding to take out an interest only loan, it’s important to understand how it works and its potential advantages and disadvantages.

What is an Interest Only Loan Payment?

An interest only loan payment is exactly what it sounds like - you only pay the interest on the loan for a certain length of time, typically the first few years of the loan. After that initial period, you’ll start making principal and interest payments.

For example, if you took out a 30-year mortgage with an interest only payment option for the first 5 years, you’d only pay interest for the first 5 years. After that time period, you’d start paying principal and interest and your monthly payment would go up.

Advantages of Interest Only Loan Payments

There are several potential advantages to choosing an interest only loan payment.

Firstly, your monthly payments will be lower during the interest-only period since you’re only paying the interest portion of the loan. This can be helpful if your income is currently lower than you expect it to be in the future, or if you have other debts or expenses you need to pay off first.

Additionally, if you’re buying a home as an investment property, an interest only loan payment can help improve your cash flow. By reducing your monthly payments, you can potentially earn a higher return on your investment.

Disadvantages of Interest Only Loan Payments

While there are some potential advantages to interest only loan payments, there are also some potential disadvantages to be aware of.

Firstly, since you’re not paying down the principal during the interest-only period, you won’t be building up any equity in the property. This can be problematic if you plan on living in the property for a long period of time, as you’ll owe the same amount of principal at the end of the interest only period as you did at the beginning.

Additionally, when the interest-only period comes to an end, your monthly payments will go up significantly. This can be a shock to your budget, especially if you’ve been used to lower monthly payments for several years.

Finally, interest only loans are typically more difficult to qualify for than traditional loans with principal and interest payments. You’ll likely need a higher credit score and a larger down payment to get approved for an interest only loan.


Interest only loan payments can be a good option for some borrowers, particularly those who need lower monthly payments in the short term or who are buying an investment property. However, it’s important to understand the potential downsides of interest only payments as well, particularly the lack of equity growth and the potential for significantly higher monthly payments in the future.

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