Straight (or Interest Only) Loan

Straight Loan Definition

A straight loan (also known as an “interest only” loan) is a loan in which the borrower is only required to pay interest payments until the maturity date of the loan, when the entire principal balance is due.

Explanation

Straight loans were quite common in the early 20th century, when their use began to decline. Today they are typically used for development loans.

Consider a straight loan of $10,000, at a 5.0% rate, over a 10 year term.

($10,000 x 5.0%) = $500/year in interest. $500/12 months = $41.67/mo., interest only payment.

Borrower would pay $41.67/month, until the maturity date of the loan, when the last $41.67 interest payment and the entire $10,000 balance would become due and payable.

 

Jim Eyre

LOAN OFFICER

Expert contributor at RealEstateWords.com

 

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