When you are looking to finance a car loan, an interest only loan is one of your options. With interest only loans, you pay only for the monthly interest but not for the principal amount of the loan. This can considerably lower your monthly car loan payments, but you should think again.
Finance a Car Loan- The Down Side to Interest Only Loans
Interest only payments don't count as repayment of the principal amount of the loan. As a result, the loan balance remains he same for as long as interest only payments are made.
Most interest only loans remain interest only for a particular period of time, usually five to ten years. After this period, the monthly payment is increased to the allotted monthly payment for the principal amount of the loan. This amount may be higher than if payment for the principal loan had been made from the start.
The popularity of interest only loans is brought about by concerns in managing one's personal finances, with the main objective of accumulating wealth during the working years in order to have a comfortable retirement.
Wealth is defined as assets less debt. Wealth is accumulated by gaining assets and paying off debts, especially mortgage debt. By paying for the principal amount of your car loan, you are increasing your asset and decreasing your debt.
This isn't the case with interest only loans. Moreover, there's not much difference when it comes to the tax payments, as interest earnings are also taxed.
Interest only loans may be good only if you have other means for gaining assets during the interest only period than by paying for the principal amount of the loan. Still, experts consider paying for the principal amount the best way to go. It surely increases your wealth and comes with no risk.
