How do interest-only personal loans work?

Interest-only personal loans operate differently from traditional personal loans, primarily in the way repayments are structured. In a standard personal loan, your monthly instalments (EMIs) include both the principal and the interest, so with each payment, you gradually reduce the total amount owed. However, with an interest-only personal loan, your payments during the initial period are limited to just the interest on the borrowed amount. The principal remains unchanged throughout this phase.

This structure can be appealing if you want to keep your monthly outgo as low as possible for a limited time. For example, you might choose an interest-only period at the start of your loan tenure, during which you pay only the interest. Once this period ends, you are required to start repaying the principal, usually along with the interest, which leads to a significant increase in your monthly payments. The total cost of the loan over its full tenure may be higher than a regular EMI-based personal loan because the principal does not decrease during the interest-only phase.

In India, interest-only personal loans are not the norm. Most personal loans follow the EMI model, where each payment covers both interest and principal, offering a more predictable repayment plan. Some lenders may offer flexible or hybrid loan products where you can opt to pay only interest for an initial period, but these options are less common and may come with specific eligibility criteria and higher scrutiny of your financial profile.