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Interest Only Loan Formula:
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An interest only loan with balloon payment is a type of loan where the borrower pays only the interest for a specified period, with the entire principal amount due as a single lump sum (balloon payment) at the end of the loan term.
The calculator uses the interest only loan formulas:
Where:
Explanation: The monthly payment covers only the interest on the principal, while the balloon payment at maturity includes the full principal plus all accrued interest.
Details: Accurate calculation of interest only payments and balloon payments is crucial for financial planning, budgeting, and understanding the true cost of this type of loan structure.
Tips: Enter the principal amount in dollars, monthly interest rate as a decimal (e.g., 0.05 for 5%), and time period in years. All values must be positive numbers.
Q1: What are the advantages of interest only loans?
A: Lower monthly payments during the interest-only period, which can be beneficial for short-term cash flow management.
Q2: What are the risks of balloon payments?
A: The borrower must be prepared to make a large lump sum payment at maturity, which can be challenging if not properly planned for.
Q3: Are interest only loans suitable for long-term financing?
A: Typically not, as they defer principal repayment and result in higher overall interest costs compared to amortizing loans.
Q4: Can the balloon payment be refinanced?
A: Often yes, but this depends on creditworthiness and market conditions at the time of maturity.
Q5: What happens if I cannot make the balloon payment?
A: Defaulting on the balloon payment can lead to foreclosure or repossession of the collateral securing the loan.