Home
Back
Interest Only Payment Formula:
| From: | To: |
Interest-only payment is a loan payment structure where the borrower pays only the interest for a certain period, without reducing the principal balance. This results in lower initial payments but requires larger payments later to repay the principal.
The calculator uses the simple interest formula:
Where:
Explanation: The calculation multiplies the principal amount by the monthly interest rate to determine the interest-only payment amount.
Details: Understanding interest-only payments helps borrowers plan their finances during the interest-only period and prepare for when principal payments begin. It's commonly used in certain mortgage products and personal loans.
Tips: Enter the principal amount in dollars and the monthly interest rate as a decimal (e.g., 0.01 for 1%). Both values must be valid (principal > 0, rate between 0-1).
Q1: What is the advantage of interest-only payments?
A: Interest-only payments provide lower initial monthly payments, which can be beneficial for borrowers with temporary cash flow constraints.
Q2: How do I convert APR to monthly interest rate?
A: Divide the annual percentage rate (APR) by 12. For example, 12% APR = 0.12/12 = 0.01 monthly rate.
Q3: When does the principal need to be repaid?
A: Typically after the interest-only period ends, which varies by loan agreement. The principal may be repaid in a lump sum or through higher monthly payments.
Q4: Are interest-only loans risky?
A: They can be riskier than traditional loans because the principal balance doesn't decrease during the interest-only period, and future payments may be significantly higher.
Q5: Can I make principal payments during the interest-only period?
A: This depends on the loan terms. Some lenders allow extra principal payments, while others may charge prepayment penalties.