1. What is an Interest-Only Loan?

An interest-only loan is a type of loan where the borrower pays only the interest for a certain period, typically the first few years of the loan term. During this period, the principal balance remains unchanged.

2. How Does the Calculator Work?

The calculator uses the interest-only loan formula:

Where:

• \( P \) — Principal amount (currency units)
• \( R \) — Annual interest rate (%)

Explanation: The formula calculates the monthly interest payment by converting the annual rate to a monthly rate and applying it to the principal balance.

3. Importance of Interest-Only Loan Calculation

Details: Understanding your monthly payment for an interest-only loan helps in budgeting and financial planning, especially during the initial period of the loan when only interest payments are required.

4. Using the Calculator

Tips: Enter the principal amount in currency units and the annual interest rate as a percentage. Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What happens after the interest-only period ends?
A: After the interest-only period, the loan typically converts to a standard amortizing loan, and your monthly payments will increase to cover both principal and interest.

Q2: Are interest-only loans a good idea?
A: Interest-only loans can be beneficial for certain borrowers who expect their income to increase in the future or who plan to sell the property before the interest-only period ends. However, they carry risks as the principal balance doesn't decrease during the interest-only period.

Q3: 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. Check your loan agreement for specific details.

Q4: How does an interest-only loan differ from a traditional loan?
A: In a traditional amortizing loan, each payment covers both interest and principal, gradually reducing the loan balance. In an interest-only loan, payments during the initial period cover only interest, leaving the principal unchanged.

Q5: What types of loans typically offer interest-only options?
A: Interest-only options are commonly available for mortgages, home equity lines of credit, and some student loans. They are less common for auto loans or personal loans.