Posts Tagged ‘interst only loan’
Determining if an Interest Only Loan is for Your Business
Tuesday, January 8th, 2008
If you have a mortgage, you’re probably aware that there’s an option for an interest only mortgage. But were you aware that there is also the option to take out an interest only business loan? Similar in concept to the mortgage version, a commercial interest only loan offers both pluses and minuses for using one. Much of it depends on your status, how much you need a loan, and how confident you are that you’ll be able to meet the repayments each month.
What is an Interest Only Loan?
Just as its name suggests, an interest only loan is where your monthly payments are against the interest only. It’s normally for an agreed period of time, usually 5 or 10 years, and at the end of that period you normally have a couple of options. The first one is to pay the outstanding balance off, or you can extend the loan and pay the normal monthly payment instead.
However, much like any type of loan, there are pros and cons to an interest only loan, and you need to be fully aware of both before you take one out.
Pros
The main advantage of taking out an interest only loan is that the repayments are a lot smaller each month. Instead of paying the full amount, the interest is only a fraction of this, and can make a big difference to your current finances. They’re especially useful if you have a cash flow problem, and need to shore up your finances in the short term.
The other main advantage is that they can be paid off quicker than a more traditional loan, whether at the end of the interest only term or beforehand. This is particularly useful if your business picks up again, and you can afford to pay the loan off.
Cons
Although useful, however, interest only loans have more cons than pros. The prime disadvantage of this type of loan is the inherent risk involved. Because they’re given against property and assets, there’s a very real chance that your business could be taken away from you should you be unable to meet the payments, or clear the loan at the end of the agreed period.
On top of this, there’s also a minimum amount you can take out. This is normally $50,000, and this is probably less practical if you just need a stopgap fix for your business. Additionally, although the loan is guaranteed against your assets, the amount you can borrow is only up to 70% of the property that you’re using as collateral.
There are many ways to take out an interest only business loan - your bank or current financial association. You can also remortgage your home and use the equity in that, but again, this is risky, and can lead to you losing both your business and home. Although it offers certain advantages, it’s a good idea to try and avoid an interest only loan unless you’re 100% sure you can afford it.
Tags: danny brown, Finance, Finance and Accounting, interst only loan, loans, small business loans, startup loans
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