Before you consider taking out a loan, you should take the time to learn about the tree types of loans. These are conventional loans, interest only loans, and negative amortization loans. The main difference between these three types of loans is how much of the debt is actually reduced with each monthly payment. Conventional loans look to pay off both debt and interest, interest only loans, as the name suggests, only pay off interest on the principal, and negative amortization loans add to total debt.
With a conventional loan, with each repayment you are paying off part of the principal owed. The more of the principal that you repay, the smaller the interest repayments and the quicker you can repay the total loan. With a conventional loan you pay back a fixed portion of the principal each month, as well as the interest on the principal. For example, if you take out a $100,000 30 year loan, you will have to repay $278 of the principal each month, as well as some of the interest. With this type of loan you can have a well structured repayment plan and you will know the exact date which you will have fully repaid your loan.
An interest only loan does as the name suggests, and that is repay interest only. With an interest only loan, with each payment you do not pay back any of the principal of loan or reduce your overall debt, you only pay back the interest of the principal. With this type of loan, you have a chance to keep paying back the interest and not fall behind on your repayments while your debt remains the same. At some pint during the period of the loan it converts to a conventional loan and you will have to pay back the debt.
The third type of loan is a negative amortization loan. This is a loan that when the full interest is not paid back each month, the unpaid interest is added onto the principal. For every interest repayment that the borrower misses, they are further in debt. For the most part these loans are unstable and usually end in foreclosure.
The problem with interest only loans and negative amortization loans is that a condition of the loan is that at a certain time the interest rate changes or the loan balance becomes due. This causes borrowers to either have to refinance or pay increased monthly repayments.