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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 during the loan term, with the entire principal amount due as a single large payment (balloon payment) at maturity.
The calculator uses the interest only loan formulas:
Where:
Explanation: The EMI calculation covers only the interest portion, while the total amount includes both the principal and total interest paid over the loan term.
Details: Accurate calculation of interest-only payments and balloon payments is crucial for financial planning, budgeting, and understanding the true cost of borrowing with this loan structure.
Tips: Enter principal amount in currency, monthly interest rate as a decimal (e.g., 0.05 for 5%), and time period in years. All values must be valid (principal > 0, rate ≥ 0, time > 0).
Q1: What are the advantages of interest-only loans?
A: Lower monthly payments during the loan term, which can be beneficial for cash flow management and short-term financing needs.
Q2: What are the risks of balloon payments?
A: The main risk is the large lump sum payment due at maturity, which requires careful financial planning and may require refinancing.
Q3: How is the monthly interest rate calculated from annual rate?
A: Divide the annual interest rate by 12. For example, 12% annual rate = 1% monthly rate (0.01 as decimal).
Q4: Are there any prepayment options with these loans?
A: This depends on the loan agreement. Some loans may allow prepayment of principal, while others may have restrictions or penalties.
Q5: What happens if I cannot make the balloon payment?
A: Failure to make the balloon payment may result in default, which could lead to foreclosure or other legal actions depending on the collateral and loan terms.