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Know the Limitations of Interest on Loan Homework Answers

by Aug 12, 2017Homework Answers

The giant business firms around the globe make the large financial transactions. The larger the enterprise, the bigger the sales of the firm will be. Sometimes, a person does not have enough money to make the desired transaction for purchasing something.  A person can be an average individual or a multimillion company owner.

To make the purchase when they don’t have money, people take loans.Manuals as interest on loan homework answers will demonstrate one kind of loan in this article.

Interest on the loan is a type of loan where one pays only interest charges over the period. The payment period sometimes exceeds more than five years for some people.

Conditions for taking loans:

Below are the scenarios under which people take interest on a loan in consideration.

  • Nowadays, people desire to purchase more homes for a kind of investment. By following a strong will, people make loans from the banks. Interest on loans seems affordable as per short term calculation. So, for the property investment interest on a loan is an option.
  • The scenario in which property needs to be sold within a short period.
  • Many people are interested in a lower amount at the initial period because of lacking money. Interest only loans give the option to pay less amount on a monthly basis. Only paying lump sum payment per month is tempting to people who purchase interest only loans.
  • People buy interest only loans and save big amount to invest on something worthy of the investment.

Interest on loan homework answers will discuss the limitations of having interest only loans for payment.

Other points of having interest on loans

  • Upside-down risk

This type of risk is also known as underwater risk. There are scenarios in which this kind of risk becomes a danger for the loan payer.

Let’s understand this type of risk with real life example.

For example, person A purchases one property and pays interest for seven years. A person has taken interest only loan in which he has to pay a minimum amount for a longer period.

Now, after owning the house completely, a person wants to sell it and earn the amount. Due to inflation and other financial crisis, the valuation of the property went down by 60%. Now a person is left with a house with very less value. This limitation of interest only loan is the upside-down risk.

  • Trusting the future more than we should

One fundamental limitation is person thinks we will be better in future. But, someday loan has to be paid. Interest only loan makes it hard on future to save amounts as every month the interest has to be paid. Sometimes, people believe that finances will be better in future but, without substantial steps, finances become no better than present state.

With interest only loans, we pay interest and owe the same amount of money we owe now a road down the decade.This is one notion that manuals as interest on loan homework answers depict.

  • No design of equity with interest only loans

We cannot build equity with interest only loans. To build equity one has to make extra payments. Loans do not encourage this by design. It becomes hard with home equity loans if ever needed cash in future.

  • No investment

Due to getting the interest on loan type, people tend to keep spending the money by paying only little to a bank as interest only loans require minimal amount per month. Sometimes, it tempts people to spend money instead of investing the money at correct areas.

  • No financial growth visibly

Even if the borrower buys an interest on for investment, there are possibilities that person will not grow financially because of long-term interest payment on interest only loans and then real amount at some point in time.

  • No discipline to pay extra amount

There are options to pay the additional amount for your loans and reduce the loan amount early to have a better stress less financial health. But, borrowers are not disciplined enough to understand the severity of interest.

As the interest itself a huge payment apart from actual payment, it does not people to save money and invest in something. Instead, borrowers are tempted to waste money after paying a small amount in interest.

We tend to think that we will pay after financial condition gets better. However, with this kind of loan, it is difficult as explained by interest on loan homework answers

  • Payment shock

This type of loan changes the focus on paying interest only. The user eventually has to pay interest and principal as well. Due to this payment gets increased significantly and it is known as ‘Payment Shock.’

This is some fundamental limitations associated with interest only loans. Every limitation says one thing, and it is that it has no financial growth. Interest on loan homework answers explains the boundaries in details that everyone can understand the risk and benefit of compound interest.

Advantages of such loans

On the contrary interest, only loans have some advantages also.

  • Low monthly payment during the loan period which leaves more money for other expenses.
  • Net-worth can be built upon saved amount from small monthly payments.
  • With interest only loans, whole amount one pays on a monthly basis is tax-deductible.
  • User can take large quantities for the bank in later part with application of big loan for another investment.

Loans should be used for financial purchases to fulfill big dreams and signing great deals. But, sticking to the loans kills the purpose of investing in something. Because at the end of the day, we end up giving too much money than we should.