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Interest Only Loan Formula:
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The Interest Only Loan Calculator calculates monthly interest-only payments for loans. It helps borrowers understand their monthly interest obligations during the interest-only period of a loan.
The calculator uses the interest only formula:
Where:
Explanation: The formula calculates only the interest portion of the loan payment, excluding principal repayment during the interest-only period.
Details: Understanding interest-only payments is crucial for borrowers to plan their cash flow during the interest-only period and prepare for higher payments when principal repayment begins.
Tips: Enter the principal amount in currency and monthly interest rate as a decimal (e.g., 0.005 for 0.5%). Both values must be valid (principal > 0, rate between 0-1).
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 both principal and interest payments are required.
Q2: How is monthly interest rate calculated from annual rate?
A: Monthly interest rate = Annual interest rate ÷ 12. For example, 6% annual rate = 0.06 ÷ 12 = 0.005 monthly rate.
Q3: What are the advantages of interest-only loans?
A: Lower initial payments, improved cash flow management, and potential tax benefits (in some jurisdictions) for investment properties.
Q4: What are the risks of interest-only loans?
A: Higher overall interest costs, payment shock when principal repayment begins, and risk of negative amortization if property values decline.
Q5: Are interest-only loans suitable for everyone?
A: They are best for borrowers with irregular income, investors expecting property appreciation, or those who plan to sell before the principal repayment period begins.