WHAT IS Standing Loan
Standing loan refers to an interest-only loan where repayment of principal is expected at the end of the loan term.
BREAKING DOWN Standing Loan
Standing loan is a loan where the borrower is required to only make interest payments over the life of the loan. At the end of the loan’s term, the borrower makes one lump sum payment of the entire principal. This structure involves increased risk to the lender because of the probability that the borrower is unable to make that final principal payment. For this reason, this type of loan is generally offered with a higher interest rate than a traditional amortized loan.
A standing loan is relatively rare and tends to be used for home or automobile purchases. It is one type of interest-only loan. More common interest-only loans are adjustable rate loans with a balloon payment at the end of an introductory period or amortized payments over 10 to 30 years.
Pros and cons of a standing loan
From the borrower’s perspective, a standing loan can be an attractive way to get into a home or other product that the borrower might not otherwise be able to afford. The monthly payments will be lower than a loan requiring repayment of principal. If the borrower has reason to believe that they will be able to make that final principal payment, the standing loan structure allows them to invest that money somewhere else over the life of the loan. In the case of a standing mortgage, interest payments are generally tax deductible, which means the borrower’s entire payment is tax deductible.
A standing loan, however, can be a risky undertaking for a borrower and has several disadvantages they should keep in mind. Standing loans are often offered at an adjustable rate, meaning that rates can climb and lead to higher monthly payments. A borrower should be careful to use the money that they are not paying as principal each month is being put to good use. The temptation to spend those savings rather than save them can get a borrower into trouble. The borrower’s acceptance of a standing loan is based on their belief that their income will support the final principal payment. If that does not turn out to be the case, this too can be trouble. Finally, in the case of real estate, the home may not appreciate as quickly as the borrower would like. This means that it may not be able to be sold to cover outstanding debt.