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Interest-Only Payment Formula:
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An interest-only commercial loan is a type of loan where the borrower pays only the interest for a specified period, followed by principal repayment. This structure provides lower initial payments, making it attractive for commercial real estate and business investments.
The calculator uses the interest-only payment formula:
Where:
Explanation: The formula calculates the monthly interest payment by multiplying the principal amount by the monthly interest rate.
Details: Accurate interest-only payment calculation is crucial for commercial loan budgeting, cash flow management, and investment property analysis. It helps businesses plan their financial obligations during the interest-only period.
Tips: Enter the principal amount in dollars and the monthly interest rate as a decimal (e.g., 0.005 for 0.5%). Both values must be positive numbers.
Q1: What is an interest-only period?
A: An interest-only period is a specified timeframe during which the borrower pays only the interest on the loan, not the principal. This period typically ranges from 1-10 years in commercial loans.
Q2: How do I convert annual interest rate to monthly?
A: Divide the annual interest rate by 12. For example, 6% annual rate = 0.06/12 = 0.005 monthly rate.
Q3: What happens after the interest-only period?
A: After the interest-only period ends, the loan converts to a fully amortizing loan where both principal and interest are paid, or a balloon payment may be due.
Q4: Are interest-only loans suitable for all businesses?
A: Interest-only loans are best for businesses with strong cash flow projections or those expecting to refinance or sell the asset before principal payments begin.
Q5: What are the risks of interest-only loans?
A: The main risk is the payment shock when the interest-only period ends and higher payments begin. There's also the risk of property value decline affecting refinancing options.