Interest Only Loan and Principle and Interest Loan Differences
To understand the difference between an interest only loan and principle and interest loan, you should know the meaning of individual terms.
Principle is the amount borrowed while interest is the lender’s fee. So when paying off the loan, you will first pay a fraction of the principle amount (installment).
Then you will pay off the interest fee, which is usually a percentage of the principle amount. This sort of loan is paid off entirely, but slowly, over the set payment term.
Interest only loan refers to a product that requires you to pay only the interest charge. This fee is usually a fraction of the principle amount minus any extra re-payments you may have made.
Unless you choose to dispose an asset or make extra repayments, an interest only loan would take fore-ever to pay off completely. It is specifically useful to investors who intend to increase their tax benefits. Homeowners also use it to reduce their re-payment burden.
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