1. What is Interest-Only Loan?

An interest-only loan is a type of loan where the borrower pays only the interest for a certain period, with the principal amount remaining unchanged during that time. This results in lower initial payments compared to amortizing loans.

2. How Does the Calculator Work?

The calculator uses the interest-only loan formula:

Where:

• \( P \) — Principal amount (currency)
• \( R \) — Monthly interest rate (decimal)
• \( EMI \) — Monthly payment (currency)

Explanation: The formula calculates the monthly interest payment by multiplying the principal amount by the monthly interest rate.

3. Importance of Interest-Only Payment Calculation

Details: Calculating interest-only payments helps borrowers understand their short-term financial obligations and plan for the eventual principal repayment phase.

4. Using the Calculator

Tips: Enter the principal amount in currency and the monthly interest rate as a decimal (e.g., 0.05 for 5%). All values must be valid (principal > 0, rate between 0-1).

5. Frequently Asked Questions (FAQ)

Q1: What is an interest-only loan period?
A: This is a specified period (typically 5-10 years) during which the borrower pays only interest, after which principal repayment begins.

Q2: What happens after the interest-only period ends?
A: The loan converts to a standard amortizing loan, and payments increase significantly as both principal and interest must be paid.

Q3: Who typically uses interest-only loans?
A: Often used by real estate investors, borrowers with irregular income, or those expecting future income increases.

Q4: What are the risks of interest-only loans?
A: The main risk is payment shock when the interest-only period ends and payments increase substantially.

Q5: Can I pay principal during the interest-only period?
A: Most interest-only loans allow voluntary principal payments, which can reduce future payment amounts.