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Interest Only Payment Formula:
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Interest-only payment is a loan payment structure where the borrower pays only the interest portion of the loan for a specified period, without reducing the principal balance. This results in lower initial payments compared to amortizing loans.
The calculator uses the interest-only payment formula:
Where:
Explanation: The calculation multiplies the principal amount by the monthly interest rate to determine the interest-only payment amount.
Details: Accurate interest calculation is crucial for financial planning, budgeting, and understanding the true cost of borrowing. Interest-only payments are common in certain mortgage products and short-term financing arrangements.
Tips: Enter the principal amount in currency units and the monthly interest rate as a decimal (e.g., 0.05 for 5%). Both values must be valid (principal > 0, interest rate between 0-1).
Q1: What's the difference between interest-only and amortizing payments?
A: Interest-only payments cover only the interest portion, while amortizing payments include both principal and interest, gradually reducing the loan balance.
Q2: How do I convert annual interest rate to monthly?
A: Divide the annual interest rate by 12. For example, 12% annual rate = 1% monthly rate (0.01 as decimal).
Q3: Are interest-only loans risky?
A: They can be riskier as the principal doesn't decrease during the interest-only period, and payments may increase significantly when principal repayment begins.
Q4: What types of loans use interest-only payments?
A: Some mortgages, construction loans, and certain business loans may offer interest-only payment options for initial periods.
Q5: How does this differ from simple interest calculation?
A: This is a simple interest calculation applied monthly. The formula calculates only the interest portion without any principal reduction.