There are two new trends in the banking world that may actually be very dangerous for consumers. Long term personal loans and interest only loans are gaining in popularity, especially in the wake of the housing crisis. While these may seem to be a great option at the time, there are many risks from these loans that should be avoided if at all possible. If you’re considering refinancing your home to an interest only loan, or if you are looking at getting a personal or car loan, it is very important to understand exactly what you are getting into before you agree to any loan.
An interest only home loan means that each month, you only pay the interest that you owe. At face value, this can save a lot of money and it may help you keep your home if you are refinancing. Even though interest rates are going up, when you’re not paying on the principle, your overall monthly payment will be lower. However, the part about not paying on the principle is the kicker.
At the end of your interest only loan you will not own your home. Instead, you will have to pay the principle, in full, in order to get the deed. Now, if you’re planning on selling your home after the loan is paid off, this may not be as dangerous. However, with falling property values and a down market, this can be disastrous. In addition, by only paying interest, you will end up spending a lot more at the end for your home. In most cases, homeowners with this type of loan find that they spend $25k to $50k more for their actual homes.
Another issue with interest only loans is that you will not have the benefit of gaining equity in your home, even though you are making payments every month. If you end up with an emergency on your hands and need to get money quickly, you will not be able to draw on the equity in your home. This is a big problem that many people do not consider. Would you rather have lower monthly payments, or the ability to earn equity in your home with every payment that you make?
Next up, long term loans are becoming very popular as interest rates go up. Most people prefer to keep their payments as low as possible, but right now, that is pretty tough. The solution has been to roll out new long term loans, particularly for cars. As an example, you may be paying only $300 a month for your car, but you will have to keep making those payments for the next seven to eight years. Compare this to the usual time period of three to five years.
That is a lot of extra interest and many people may not even realize just how much extra they are paying. At the end of the loan term, you will have spent thousands more than the car is worth and by then, the vehicle has depreciated to the point where you will never get that money back. Long term loans do make it easier to make payments, but at the end of the day, you’re worse for the wear.
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Originally posted 2008-08-19 05:21:57. Republished by Blog Post Promoter
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3 comments ↓
We need more reminders like this to get people to stop taking on dangerous debt. Interest only loans are such a bad deal!
Demand loans are short term loans that are atypical in that they do not have fixed dates for repayment and carry a floating interest rate which varies
according to the prime rate.Online Finance Help
These crazy tools were at the beginning of the crisis. Interest only loans are for very special purposes and should be carefully considered. The basic rule is – maintain a cash buffer, ideally 6 monthly payments, in this case I would say even more, much more. An be aware we witness now the lowest interest rates in history, this situation will not go on forever!
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