Interest-only loans come with several notable disadvantages that potential borrowers should consider. One major drawback is the higher interest rates associated with these loans compared to conventional mortgages. While the monthly payments may seem more manageable, this is often due to the fact that borrowers are only required to pay the interest on the loan, delaying the repayment of the principal amount.
Another significant disadvantage of interest-only loans is the deferment of principal payments. Unlike traditional mortgages where each payment goes towards both interest and principal, interest-only loans allow borrowers to delay paying off the principal amount. This means that while the initial payments may be lower, borrowers will eventually face larger payments when the interest-only period ends.
Furthermore, interest-only loans can increase the overall cost of borrowing. Since borrowers are not reducing the principal balance during the interest-only period, they are essentially borrowing more money for a longer period of time. This can lead to paying more in interest over the life of the loan compared to a traditional mortgage where the principal balance decreases with each payment.
(Response: The main disadvantage of an interest-only loan is the higher interest rates, which can lead to increased overall borrowing costs and the deferment of principal payments, resulting in larger payments later on.)