Most people who have taken out a form of loan, whether it is for housing or consumption, have probably been offered to make part of the repayment period interest-free. There are very divided opinions about how much benefit you have from such an offer, and where some believe that interest-only loans are just a smart way for the bank to make more money, others will see clear benefits. If you are unsure about how the loan is made without interest, you can read a little about the advantages and disadvantages of this article.
What does it mean to get a loan repayable?
When you take out a loan and make it interest-free, it simply means that you only have to pay what is interest and fees. Thus, you postpone the repayment of the loan itself in time, but with the advantage that the bills for the period it is interest-free will be lower. How long you can get your loan free of charge will be different from provider to provider, and it will also have a lot to say what kind of loan you have. For example, in some cases you can get a mortgage loan for up to 10 years, while consumer loans can usually give you interest for up to 3 years, or you can get some installment-free months a year.
The way it is arranged will vary from company to company, and in some cases you may also be denied the right to deduct, or something that is simply not offered. It is usually in cases where the provider sees that you will have trouble repaying the loan when you get the full installment amount of loans and interest, that you can be denied such a scheme.
With some loan providers you will also be able to receive payment deferrals. It differs from the repayment period in that you postpone the entire payment and not just the repayment of the loan itself. It is common, for example, for some credit loans that you can also get a free month or two a year here. The loan fund that manages student loans in Norway has up to 12 payment-free installments. But it is important to remember that even if you do not have to pay, the interest rates will still run, and you will still increase the total amount you have to repay.
Debt-free loans have received a great deal of criticism, and the Financial Supervisory Authority introduced guidelines in 2010 that set a maximum limit of 70% loan-to-value ratio in order to offer debt-free repayment. For mortgages, this has meant that the proportion of loans with a form of repayment has decreased from 25% to around 17%.
Much of the criticism surrounding such a scheme is that the total amount to be repaid can increase quite significantly. The difference between just paying interest and fees, rather than having to pay directly on the loan, can be several thousand dollars a month on larger loans. So, if one acquires a disproportionately high consumption with low expenses, one can have big problems when the time of interest is spent. Norway has also had relatively low interest rates on mortgages for a very long time, and an increase here will quickly make monthly repayments more difficult.
Positive aspects of installment
There are not necessarily only negative sides to the possibility of only paying interest and fees for a period, on the contrary. Using it in a thoughtful way can in some cases also be beneficial to one’s personal finances. If you have other loans that are more expensive than the loan for which you can get repayment, it might be a good idea to focus on paying the most expensive loan first. In times of tight finances, it will also be easier to overcome the problem by using such an offer.
In some cases, it may also be perfectly acceptable to take advantage of interest-only deductions, or deferred payment if possible, for a month or two to be able to indulge in something extra, such as a little more money to spend on a vacation. The most important thing is that you are aware of the extra costs involved and that you only use such a scheme after a good overall assessment of your own situation and finances.