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What is an Interest-Only Payment?

Chris Gottschalk

Chris Gottschalk About The Author

Jul 14, 2020 7:00:00 AM

One of the worst parts about financial hardship is not being able to pay all your bills. It’s embarrassing, and if you can’t make a loan or a mortgage payment, it’s also scary.

Fortunately, most lenders will work with you to help you catch up on your loan. They have several ways to do this. One way they might help is by giving you the option to make an interest-only payment.

Interest-only payments are exactly what they say they are. Instead of making a monthly payment that goes toward the interest on your loan and the principal (the loan itself), an interest-only payment means you only have to pay the interest, which can be much less than the full amount.


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How do I Get an Interest-Only Loan?

Couple without money | First Alliance Credit UnionMost people don’t go out of their way to get an interest-only loan. In fact, the only reason you might get an offer for an interest-only payment is if a lender offers the option to you after you’ve let them know you might not be able to make a full payment on your loan—before the payment comes due.

If you’ve had some temporary financial hardship, like getting divorced, dealing with a medical emergency or losing your job, an interest-only loan can provide you with some financial relief.

The Advantages of Interest-Only Payments

The obvious advantage of an interest-only payment is that it reduces your payment for however long you and the lender decide. It also means you won’t be penalized for making a late payment or not making a payment at all, so you won’t damage your credit score.

While this is only a temporary solution, this can be an excellent short-term solution if you need a month or two to get back on your feet financially.

The Drawback of an Interest-Only Loan

Money over time | First Alliance Credit UnionLike a lot of methods lenders can use to help you get caught up on your loans, interest-only payments can be a lifesaver in the short-term. However, they do have one significant drawback—they don’t help you get ahead on your loan.

Since you’re not paying down the principal of your loan, you’re essentially extended the term of your loan. Ultimately, you will end up paying more, since you’ll need to make a couple payments more than you would have if you hadn’t made interest-only payments.

Having said that, when you get an interest-only payment, you’re not making a promise to pay back all the money you owe later, as you would with a forbearance. You’re also not breaking the payments you missed into chunks that will then be added into later payments until you’re caught up, the way you would with a payment plan. All you need to do is start making the full monthly payment again.

Get Help in Uncertain Times With First Alliance Credit Union

If you’re going through temporary financial hardship, your lender might be able to offer you some financial relief by making your loans interest-only for a month or two. You will end up paying more in the long run, but in the short term it can help give you some financial relief until you can get back on your feet.

You can also become a member of First Alliance Credit Union and take advantage of the services we offer to any member suffering through financial hardship. Our Anytime Skip a Pay program is another way you can get some temporary financial relief, and our lending advisors can help you find ways to save money, from consolidating your debts to refinancing your loans. You can also look through the First Alliance Resource Center to find financial guides and calculators that will help you do anything from creating a budget to figuring out the length of time you’ll need to pay off credit cards.

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