Interest Only Line of Credit and Principal Reduction

So how do you lower the balance on the interest only line of credit?

1 Answer

Your minimum payment is only simple interest, but like most loans you can pay additional towards the principal balance with your monthly statement. As a side note, in doing this the advantage of an interest only line of credit is that your next months minimum payment will go down.

For example, if you have a $25,000 line of credit at Prime -1 (currently would be 6.5%) and your minimum payment is $135.42, if you make a payment of $500 this month $364.58 would be applied towards your principal balance. Next month if you made the same payment of $500 your balance would go down to $24,635.42 and your minimum payment would go down to $133.44, so $366.56 would be applied towards your principal balance. This is the power of simple interest vs an amortization schedule.