What is an Interest Only Loan?
An interest-only loan is where you as the borrower simply pay the accruing finance charges on the money borrowed, which means that the amount you owe never decreases. At the end of the loan's stated term, you will need to either convert the balance owed to a conventional loan or pay the loan off with cash or other liquid assets.
To calculate interest on a loan balance, you divide the decimal form of the annual percentage rate by the number of payment periods per year and then multiply that result by the current balance owed.
For example, if your current balance was $10,000 on a 12%, monthly payment loan, the current finance charge would be $100.00 (.12 ÷ 12 x 10,000). If you fail to make the $100 interest payment, then that amount may be added to your loan balance -- in which case you would end up paying finance charges on finance charges.
Benefit of Interest Only Loan
The benefit of an interest-only loan is that you get to collect a lot more finance charges from the borrower without having to do any extra paperwork.
Oh, did you mean what is the benefit to the borrower? I can't think of any benefit to the borrower, so I assumed you were referring to the benefit to the lender. Sorry.
Better to Make Interest Payment than No Payment
As a borrower, if you can't make a full principal and interest payment (PIP), the last thing you want to do is let the finance charges pile onto the loan balance. That is unless your purpose is to help your lender's CEO to expand his swimming pool to Olympic size.
If that's not your intention, then you will probably want to limit your interest-only loan payments to times when there is simply no other less costly alternative.