Interest-Only Loans Guide | How They Work & Risks

Overview

Interest-only loans let you pay only interest for an initial period, reducing early payments but increasing future principal repayment. Ideal for some investors or short-term strategies.

Step 1: What is an Interest-Only Loan?

Only interest is paid during the initial period while the principal remains unchanged.
After this period ends, monthly payments increase as you begin repaying the principal.

Step 2: Benefits

• Lower early payments
• Can improve cash flow
• May suit property investors

Step 3: Risks

• Higher payments later
• No equity build-up during interest-only period
• Potential negative amortization if rates rise

Step 4: Choosing the Right Loan

• Check the length of interest-only period
• Compare lenders for fees and APR
• Use calculators to plan future repayments

FAQs

Q1: Who should consider an interest-only loan?

Investors or borrowers with short-term cash flow needs.

Q2: Will payments increase after the interest-only period?

Yes, payments rise as principal repayment begins.

Q3: Can I switch to a standard repayment during the interest-only period?

Yes, many lenders allow early principal payments.

Q4: Are interest-only loans riskier than standard loans?

Potentially, because payments increase later and equity builds more slowly.

Tools and Resources

Calculate Interest-Only Payments

Estimate your interest-only loan monthly payments accurately.
👉 Interest-Only Calculator

Compare Interest-Only Lenders

Quickly compare rates and terms from 2–3 lenders side-by-side.
👉 Compare 2–3 Lenders