4
$\begingroup$

A normal loan has to be paid back with interest. Every now and then there are interest-free loans where only the loan has to be paid back but no interest, e.g. among relatives or friends, but also as a form of state subsidy.

I am looking for the name and examples of interest-only loans from practice where only an interest has to be paid for some period of time, but the loan itself doesn't have to be paid back. I can imagine situations where such loans (or gifts) may make sense (again among relatives or friends or as a form of state subsidy). The idea might be: The borrower must continuously prove that he is serious and worth the gift.

Improve this question
$\endgroup$
1
  • 1
    $\begingroup$ I guess there is a difference between "interest paid forever" and "interest for X time" – the second one can be reworded to a normal (possibly partial) "pay back in rates" plan. (There might be also a version like "interest forever, but one side has an option to cancel it (which then forces a payback)". $\endgroup$
    – Paŭlo Ebermann
    Commented Mar 29, 2022 at 21:22

3 Answers 3

Reset to default
6
$\begingroup$

Classic example are the British consol bonds. British consol bonds are perpetuities so that means the principal never has to be paid back (although government could repurchase them on an open market).

Consols only pay coupon payments (interest equivalent for bonds) and since they are perpetual the principal never has to be paid back.

General term for such loans where principal does not need to be repaid is perpetual loans (although most people will just use term perpetuity which is umbrella term that can be used for any asset, not just loan, which entitles owner to perpetual interest rate payments).

Improve this answer
$\endgroup$
6
  • $\begingroup$ Is there a common name for this type of loan? Is "interest-only loan" ok. (I mean, consol bonds are only an example - of what?) $\endgroup$
    – Hans-Peter Stricker
    Commented Mar 29, 2022 at 12:21
  • $\begingroup$ What about "interest-bearing gift"? $\endgroup$
    – Hans-Peter Stricker
    Commented Mar 29, 2022 at 12:24
  • 4
    $\begingroup$ @Hans-PeterStricker If you read the first sentence of 1muflon1's reference, you'll find "...consols [...] were government debt issues in the form of perpetual bonds", and following the link for perpetual bond you'll find "A perpetual bond [...] is a bond with no maturity date". $\endgroup$
    – Giskard
    Commented Mar 29, 2022 at 12:36
  • $\begingroup$ @Giskard: The rationale of perpetual bonds is explained in the WP article: "Most perpetual bonds issued in the present day are deeply subordinated bonds issued by banks. The bonds [...] help the banks fulfill their capital requirements." Can you explain in a few words what this means? How do perpetual bonds help the banks fulfill their capital requirements? Which requirements exactly? $\endgroup$
    – Hans-Peter Stricker
    Commented Mar 29, 2022 at 12:43
  • 1
    $\begingroup$ @Hans-PeterStricker if gift bears interest then by definition it ceases to be a gift. The name for such loans are perpetuities (perpetual loans - although not every perpetuity needs to be a loan but perpetuity is umbrella term that includes all such loans where only interest is being paid). Or you could just use term perpetual loan (although people will typically just say perpetuity even though its technically an wider umbrella term) $\endgroup$
    – 1muflon1 ♦
    Commented Mar 29, 2022 at 12:46
2
$\begingroup$

We were talking about such loans in one lecture, but in detail, we discussed interest-only mortgages. I have some notes on it and will write the info I have here; maybe, for someone, it will be interesting and informative.

The term "interest-only mortgage" (IO mortgage) refers to a house loan that enables you to pay only the interest for a specific time frame. After that time, you have three options: refinance, make a lump sum payment for the remaining balance, or start making regular monthly payments. The advantage of an interest-only mortgage is that you can make minimal monthly payments for the first few years you own the house. However, there are several disadvantages, and interest-only mortgages are regarded as risky. Here is all the information you require on how they operate and how to be eligible.

Such a loan type has both pros and cons.

Pros:

  • monthly payments are usually lower
  • rates may be lower as well
  • can help you to buy a better and more expensive home

Cons:

  • low payments are temporary
  • rates can go up
  • existing equity gained from the payment can be lost

It's hard to say whether such a loan is good or bad, it's up to a person to decide.

Also, when I was looking for some additional information on that topic, I came across this article https://fitmymoney.com/how-to-pay-your-mortgage-with-a-credit-card/ which is also dedicated to paying off mortgages, but with a credit card. I've never had it and never paid it off with cash or a card, but that information is pretty interesting and useful. There are aslo descriptions of cars, and one of them offers bonuses for the sum you pay off. Maybe, it's also financially beneficial, and I just need to learn more detail

Improve this answer
$\endgroup$
1
$\begingroup$

In his comment to the original question user Paŭlo Ebermann gave me the right hint: I posed my question unclearly and did not mention that I were interested mainly in non-repayable loans with interest but finite term.

And Paŭlo is perfectly right that this is just partial pay back in rates.

We then may compare (in order of "generosity")

  • full pay back at once with interest

  • full pay back in rates with interest

  • no pay back with interest (no maturity date = perpetual bond)

  • partial pay back at once

  • partial pay back in rates

  • no pay back without interest (= gift)

In the partial cases you don't need interest but can subsume it in the part to be paid back.

So the answer to my question is: This kind of interest-only loans is essentially to be called "partial pay back in rates".

On the market partial pay back doesn't play a role because its definitely a (partial) gift (the rest that doesn't have to be paid back) and gifts are not made on the market, right?

But partial pay back in rates may be a tool of state subsidy.

Improve this answer
$\endgroup$
1
  • $\begingroup$ So when you say "pay back in rates" it means there isn't a date where you pay the principal but you make interest payments in perpetuity? In that case, how can it be partial? Wouldn't the payments eventually add up to more than the loaned amount since you pay forever? Or am I missing something? $\endgroup$
    – Nicolas Torres
    Commented Dec 3, 2023 at 21:52

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.