Post by kevinkelly on Feb 3, 2015 17:33:48 GMT
My understanding of the term "interest only" may be defective.
In round number terms, if the usual repayment on a loan is £1,000 per month, and interest/capital split is 50/50, then "interest only" payment would be £500. This would cover only the month's interest, and not reduce the capital outstanding at all. Consequently there would be additional months added to the term so that the capital is repaid.
So if, for example, a borrower paid 3 months "interest only" they would pay £1,500. If they paid, say, £3,000 which is equivalent to 3 months full payment but had that applied to cover "interest only" then there would be no benefit derived by the borrower.
What am I missing?
In round number terms, if the usual repayment on a loan is £1,000 per month, and interest/capital split is 50/50, then "interest only" payment would be £500. This would cover only the month's interest, and not reduce the capital outstanding at all. Consequently there would be additional months added to the term so that the capital is repaid.
So if, for example, a borrower paid 3 months "interest only" they would pay £1,500. If they paid, say, £3,000 which is equivalent to 3 months full payment but had that applied to cover "interest only" then there would be no benefit derived by the borrower.
What am I missing?