In difficult economic times, such as we're experiencing today, many of us struggle to meet our obligations. When the cost of living rises, there must be a commensurate rise in income to keep our budgets in line. Sometimes a single circumstance changes in our lives, and we suddenly find ourselves in a financial bind. Banks are always on the lookout for new ways to make money, and offer all sorts of finance packages designed to keep you consuming and afloat. One such offer is the interest only loan.
As the name suggests, an interest only loan requires only that you pay the interest on the principle borrowed, on a monthly basis. At first glance, this can seem an attractive bailout from an unattractive financial situation. Sometimes the stress of dealing with a hand-to-mouth financial condition can tip the balance between common sense and a poor decision.
This is about the point where you'd be ready to throw up your hands and go for one of these imaginative bank deals. Anything to be rid of the worry you're going through right now. Get the loan, get creditors off your back and make one single small payment. Sounds good? Not so fast!
If you're already in a disadvantaged financial position, you need to carefully consider the long term effects of taking an interest only loan. If you borrow $5,000 on an interest only loan agreement, you can find immediate respite to the daily stresses, with an initially minimal payment the only consequence. You can deal with that a lot easier than this constant hassle. Let's say your interest rate works out to 10% APR. This means that each year you will pay $500 in interest. The payment is really no big deal, but the fact remains you still owe the $5,000.
Too often, desperate measures are employed to alleviate immediate stress, while ignoring the fact that you're buying in to long term consequences. If you need the interest only loan as a means to stay afloat and sane today, chances are this is not a good financial move.
There are situations where the interest only loan works, but ironically, this is usually when you have a lot of other options on the table, and don't need to exercise this as your last resort. When used as a short term vehicle to maximize cash flow while waiting on your receivables, the interest only loan can be beneficial and a smart move.
In summary, if you're already struggling, it's probably wisest to avoid this type of loan, because in the long term, you may find yourself in a worse situation than before you took the loan. Unfortunately, you've got to have some money behind you to take advantage of the up side of the interest only loan. Should you be undecided as to whether this is a good move in your particular situation, consult a financial advisor. If you cannot afford to consult a financial advisor, you have your answer. Be smart and preserve your credit.