Question

With an interest only loan, the principal is?

1) Paid off gradually over time
2) Paid off in a lump sum at the end of the loan term
3) Not paid off at all
4) Cannot be determined

Answer 1

In an interest only loan, the principal is not paid off at all. The borrower is only required to make interest payments during the loan term, and the principal amount remains the same throughout the term.

Step-by-step explanation:

In an interest only loan, the principal is not paid off at all.

This means that the borrower is only required to make interest payments during the loan term. The principal amount remains the same throughout the loan term, and it is typically paid off in a lump sum at the end of the loan term.

For example, if someone takes out a 5-year interest only loan with a principal amount of $10,000 and an annual interest rate of 5%, they would only need to make interest payments of $500 per year for 5 years. At the end of the 5-year term, they would owe the full $10,000 as the principal amount.