Final answer:
The main component of an interest-only loan is the principal amount, and payments during the interest-only phase cover only the interest. Banks may facilitate these loans and view them as assets, trading them in primary and secondary loan markets.
Step-by-step explanation:
The main component of an interest-only loan is the principal amount. During the interest-only period, the borrower is required to pay only the interest on the principal. This means that the principal balance does not decrease, and the monthly payments are lower than those of a conventional amortizing loan where both principal and interest are paid off over time.
In a typical 30-year mortgage loan, for instance, borrowers may have an interest-only period for a set number of years at the start of the loan term. After this initial phase, the loan typically reverts to a standard amortization schedule where payments include both principal and interest.
It's important to note that while the initial payments are lower, the overall interest paid over the life of an interest-only loan could be higher, as the principal is not reduced during the interest-only period.
Banks and financial institutions often operate within primary and secondary loan markets. Banks may issue loans and charge fees, and then sell these loans to other financial institutions, which highlights how loans are viewed as assets to banks and traded within these markets.