There are now many lenders offering minimum payment options. For the borrower it is critical to understand how these loans work before they sign up for them. Here are some items to consider:

1. Different payment level options

The basic feature of these types of loans is that a customer has a choice in the amount of payments they make for an initial period. This can give you several different levels of payments you can make each month. For example, you can pay the loan at the 30 year loan level, at the interest-only level, or even less than interest only.

2. Minimum payment term

The minimum payment in the beginning can be less than interest-only. Anytime you choose to make this payment, the difference between your payment and the interest-only payment is added to your principal. For example, if the interest-only payment is $2,000 and the minimum payment is $1,700, if you choose to make the minimum payment then $300 will be added to your principal ($2,000-$1,700-$300).

3. Indexes

The interest rate on many of these types of loans is based on an index. This index can change on a monthly basis. The interest rate is the combination of the index plus a fixed margin. As the index changes, so does the interest rate. These indexes include LIBOR, COSI, CODI, and others. These indexes change at different rates. Sometimes the indexes can be the ongoing average of the past 12 months of a specific interest rate measure. Since a rolling average is being used, changes in the index occur more slowly over time.

4. Escalating payments

Minimum payment loans typically offer the minimum payment option for the first five years of the loan. Each year the minimum payment is fixed, but is increased slightly each year for the first five years. This is an example, and you should check carefully the options for the loan you are looking at.

5. Recast of the loan

Some loans require that the loan be