12/ 13/ 2007
by Glenn Townes
It's no secret that interest-only loans are a big draw for a lot of people without a steady or regular paycheck, especially individuals who work on commission as well as entrepreneurs. But are interest-only loans right for you?
Perhaps. But the loans are often risky and frequently have some uncompromising caveats attached to them. For example, people mistakenly or inadvertently take out interest-only loans only because of the lower payments and the often-quick turnaround of the fast cash, which is usually a day or two. People often look at only the initial payment that is already about as much as they can afford. What many fail to realize is that after the interest-only payment period ends, the monthly payment will increase and usually quite substantially.
Payday loans offer interest-only payment option
There has been a proliferation of payday loans. Fast and easy loan companies offer fast and short-term loans to people with a modest or poor credit rating. In most cases, the loans can be obtained in less than 24 hours with little more than an electronic signature and some verifiable information. For example, if a business owner needs to purchase some equipment for his company and doesn't have a pristine credit record, the payday loan company can have as much as $500 transferred to a checking account in less than 24 hours. Repayment options often include paying only the often-exorbitant interest on the loan and a nominal amount or nothing at all on the principle.
While many financial services and consumer advocate groups condemn payday and interest-only loan agencies and compare the groups to legal loan-sharking, some entrepreneurs contend that the interest-only loan companies offer a speedy resolution to cash troubles. The companies may provide a limited cash flow to a business owner who is waiting to receive a sizable payment from a customer.
Refinancing traditional interest only loans
However, in some cases, refinancing, or “moving” as a traditional interest-only loan is commonly referred to, may not be as easy. This is especially true if a borrower's credit score has gone down since the time when the initial loan was taken out. In some cases, traditional interest-only loans are indeed a viable option for entrepreneurs who own property and work out of their home. However, if the homeowner's property doesn't appreciate in value during the first three to five years, it may be difficult to get a better loan. Some home loan and mortgage industry experts contend that if an individual is planning to retire in that same house or business location, then an interest-only loan is probably not right for the homeowner and/or entrepreneur.
According to various statistics, nearly one quarter (24 percent) of all mortgage loans approved in 2004 were interest-only. While the number of these kinds of loans is increasing, they must be pursued with caution and careful monitoring. The loans were originally targeted for savvy borrowers who wanted to use their mortgage as a key investment vehicle in their overall financial and business management plan. The interest-only loans allowed liquid cash for other investments. This is an especially wise investment strategy if the individual planned to sell the home or business or refinance the loan prior to the end of the interest-only payment period.
Finally, if you already have an interest-only loan in, now may be the time to determine if there are refinance options available. Questions, such as how long you plan to stay in the property, if you want to sell the business and how much you can afford to pay, should be taken into consideration. In addition, even if you have an interest-only loan, consider paying at least a nominal amount toward the principal, which may decrease the amount of the interest-only payment you are making each month.
