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In order to draw more borrowers, an introductory loan or a ‘honeymoon loan’ offers loan at very low interest rates for the first one year of the loan term, after which it again automatically reverts to a much higher variable rate for the rest of the loan term. Introductory loans may have either fixed rates, variable rates or even capped interest rates. The repayments can be made on a weekly, fortnightly or monthly basis.
The greatest advantage of these loans is that they are available at comparatively quite low interest rates and encompass no frills with some lenders even offering an offset facility with these loans. If the repayments are made regularly at the interest rate prescribed following the initial 12 month introductory period, then chances are strong for any borrower to clear off the principle loan amount quite speedily.
The greatest drawback of introductory loans is that the repayments may be very bulky soon after the introductory period or honeymoon gets over. Borrowers who have opted for a fixed introductory rate may suffer from two different sets of difficulties. Firstly they may end up paying much higher amounts towards loan repayment in case the interest rates fall and secondly, fixed rate loans are followed by brief periods of variable rate repayment after the expiry of the initial “honeymoon” period.
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