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Interest Only Payment Formula:
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Interest only loan repayment is a payment structure where the borrower pays only the interest on the principal balance for a specified period, without reducing the principal amount. This results in lower monthly payments during the interest-only period.
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: Understanding interest-only payments helps borrowers plan their finances during the interest-only period and prepare for higher payments when principal repayment begins.
Tips: Enter the principal amount in currency and the 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 period?
A: An interest-only period is a specified timeframe during which the borrower pays only the interest on the loan, without reducing the principal balance.
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 ends?
A: After the interest-only period, payments typically increase as they include both principal and interest repayment.
Q4: Are interest-only loans suitable for everyone?
A: Interest-only loans can be beneficial for those expecting future income increases or planning to sell the asset, but they require careful financial planning.
Q5: Can I make principal payments during the interest-only period?
A: Most lenders allow additional principal payments during the interest-only period, which can help reduce the overall loan balance.