What is Interest-Only (I/O) Period?
The Short Answer
Interest-Only (I/O) Period explained simply
An Interest-Only (I/O) Period is a set time at the start of a loan. During this period, you only pay the interest that builds up on the loan. You do not pay down the original amount borrowed (the principal). This means your monthly payments are lower at first. After the I/O period ends, your payments will go up because you will start paying both interest and principal.
Real-World Example
Buying a Business with an I/O Loan
Imagine you buy a business for $500,000. You get a loan with a 12-month Interest-Only period. If your interest rate is 7%, your monthly interest payment would be about $2,917 ($500,000 * 0.07 / 12). For the first year, you only pay this amount. After 12 months, you start paying both interest and principal, making your payments higher.
Why this matters
An I/O period can help you manage cash flow when you first buy a business. It gives you time to get the business running smoothly before you have to make larger loan payments. This can be especially helpful if the business needs initial investments or has a ramp-up period.
An I/O period can be a good tool for managing early cash flow. But remember, the principal still needs to be paid. Make sure you have a plan for when those higher payments kick in.
An I/O period can be a good tool for managing early cash flow. But remember, the principal still needs to be paid. Make sure you have a plan for when those higher payments kick in.
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