What Is A Non Amortizing Loan

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 A non-amortizing loan, also known as an interest-only loan, is a type of loan where the borrower is only required to pay the interest on the loan during the term of the loan. Unlike traditional loans where payments typically include both principal and interest, with a non-amortizing loan, the borrower is not required to pay down the principal balance.

Non-amortizing loans are common in certain situations, such as real estate financing or business loans, where the borrower may prefer lower initial payments or where the cash flow is expected to increase in the future. These loans often have a specified term, at the end of which the borrower may need to pay off the entire principal balance in a single payment, refinance the loan, or convert it into a traditional amortizing loan.

While non-amortizing loans can provide flexibility in managing cash flow, they also carry risks, such as potential payment shock when the loan term ends and the borrower is required to pay off the entire principal balance. Additionally, because the principal balance does not decrease over time, the total interest paid over the life of the loan can be higher compared to an amortizing loan with the same interest rate and term.

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