An interest only loan is one in which you pay your interest first. Banks and financial institutions provide you with two options for paying the interest — you can either pay just the interest for some time or pay off the total interest first. If you choose to pay merely the interest for some time, you have to pay your Full EMIs after the agreed period.
Alternatively, if you choose to pay back the total interest amount first, then you have to repay the principal amount all at once or in multiple payments after the interest is fully paid. If you select the second option, your lender charges you interest again following your repayment preference.
Still confused about what an interest only loan is? Read on for more clarity and if you need help in calculating interest only loans.
Additional Read: Avail of a better interest rate for your Personal Loan
How is an interest only loan different from other types of loans?
When you take a personal loan, a home loan, or a used car loan, the lender decides your monthly repayment based on the principal amount and the total interest. They divide your repayment into EMIs. On the other hand, when you take an interest only loan, your bank or financial institution asks you to repay the interest first for a period of your choice. Suppose you decide to pay the interest first; then, the lender divides this amount into EMIs. You can later repay the principal amount in full.
Is an interest only loan a good choice?
Uncertain whether an interest only loan is a suitable choice for you? Here are the advantages and disadvantages of interest only loans.
Advantages of an interest only loan
Lower repayment options: Everybody wants a loan with low EMIs. Since you initially have to pay off just the interest in an interest only loan, this credit instrument is ideal for keeping your EMI amount in check.
Borrow the amount you need: An interest only loan is a blessing if you need a large sum of money and cannot afford hefty EMIs. This loan allows you to borrow a substantial amount of money and repay just the interest to start with.
Disadvantages of an interest only loan
Expensive: Still facing issues with calculating interest only loans? Remember that since lenders give you the option to pay only the interest first, an interest only loan comes at a higher interest rate.
The overall repayment amount increases: If you choose to go for an interest only loan, the repayment amount increases if you decide to clear the principal amount in parts and not in full. This is because banks recharge interest if you choose the partial payment option.
Additional Read: Learn the difference between simple interest vs compound interest
Eligibility criteria for interest only loans
The eligibility criteria for interest only loans are almost the same as those for other loans. Extensive documentation is needed to approve an interest only loan because this is the only way for banks to verify your loan repayment capability. Financial institutions review each application strictly and approve the loan based on your income and credentials.
- You must be an Indian citizen with proof of stable income.
- Your credit history must be trustworthy, and your credit score must be excellent. Usually, a CIBIL score above 750 is considered ideal.
- You must have government-approved identity proof and address proof.
Despite the high cost of interest only loans, they are a good option for people who are unable to pay a large EMI due to other financial obligations or commitments. Calculating interest only loans beforehand will help you get the ideal loan at the correct personal loan interest rate for yourself.
Summary: An interest only loan can be an attractive choice if your current financial situation does not allow you to pay hefty monthly EMIs. Since an interest only loan requires you to pay off only the interest component to start with, these can be a boon in some situations. This guide will help you identify the pros and cons of an interest only loan and enable you to decide if the high-interest rate and repayment terms work for you.
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