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What is the difference between an amortising loan and an interest only loan?

What is the difference between an amortising loan and an interest only loan?

An amortising loan is like a traditional repayment mortgage where the borrower pays a constant amount over the life of the loan. The loan repayments are composed of capital and interest, with an increasing amount of capital paid off every month.

An interest only loan is the same as an interest only mortgage where the borrower pays interest payments over the life of the loan and repays all of the capital in one lump sum at the end of the term.

The main difference for a lender is that an amortising loan reduces the risk for the lender every time a repayment is made, because you are having some of your capital investment repaid. If you are investing in an interest only loan, it is important to consider whether the borrower will be able to make the entire repayment in one go at maturity.

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