1. What is an Interest Only Loan Calculator?

The Interest Only Loan Calculator calculates the monthly payment for an interest-only loan, where you only pay the interest portion each month without reducing the principal balance. This tool follows Bankrate's calculation methodology.

2. How Does the Calculator Work?

The calculator uses the interest-only payment formula:

Where:

• \( P \) — Principal loan amount ($)
• \( r \) — Annual interest rate (decimal)

Explanation: The formula calculates the monthly interest payment by converting the annual rate to a monthly rate and multiplying by the principal amount.

3. Importance of Interest Only Payments

Details: Understanding interest-only payments helps borrowers plan their cash flow during the interest-only period of loans, commonly used in mortgages, business loans, and certain types of personal loans.

4. Using the Calculator

Tips: Enter the principal amount in dollars and the annual interest rate as a percentage. Both values must be positive numbers to calculate valid results.

5. Frequently Asked Questions (FAQ)

Q1: What is an interest-only loan?
A: An interest-only loan requires the borrower to pay only the interest for a specified period, after which principal payments begin or the loan must be refinanced.

Q2: How long do interest-only periods typically last?
A: Interest-only periods usually range from 5-10 years for mortgages and may vary for other loan types.

Q3: What happens after the interest-only period ends?
A: After the interest-only period, payments typically increase significantly as you begin paying both principal and interest, or the full balance may become due.

Q4: Are interest-only loans risky?
A: They can be risky as they don't build equity during the interest-only period and may lead to payment shock when the principal repayment begins.

Q5: When are interest-only loans beneficial?
A: They can be useful for investors expecting property appreciation, borrowers with irregular income, or those needing lower initial payments.