Wednesday, February 25, 2009

Interest Only Loan Rate - Is it Good For You?

The banks have many ways of earning money by feeding the hungry consumers with various kinds of loans. These are targeted at customers that are in dire need of money just avoid getting broke. Interest only loan is a good example of this.

Just Pay the Interest - Attractive Solution?

As evident from the name, the interest only loan requires you to pay just the interest every month. From the look of it, this is the best solution in deep financial crisis and is the reason many may opt for such loans. If you have a poor financial capacity staring you in the face, there is nothing much you would reason before getting a loan.

This is a highly attractive solution, if you want to get the creditors of your back. Take an interest only loan from a bank and worry only about a single problem. That can be a huge relief to many people who have to deal with nagging creditors everyday. Unfortunately, the picture is not as rosy as it seems.

Instant Relief or Not?

Typically, such loans are most attractive to people that are in deep financial problems. At such times your reasoning can get muddled and very near sighted. For example an interest only loan for ten thousand dollars would give you instant relief from the financial stress that you are going through.

Though this looks simple, it can actually be a problem for you. At 10% interest rate, for a $10,000 loan, you pay $10,00 annually. Now this is not a huge loan to repay, but the principal amount is not touched, which means you will keep paying the interest forever.

Check Alternatives

Short terms benefits superseding long term impacts are not new, especially when the situation is very bad. If the interest only loan seems to be the perfect solution for you, it probably is not and you are missing something. So give it a careful thought.

However, the interest only loan is not always bad. There are situations where it can be a good financial tool too. However, there may be other alternatives too that you may want to explore before zeroing on the interest only loan. If you have a short term crisis and want some quick, no-frills financial solution, the interest only loan may be a great option.

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