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 monthly payment obligations is crucial for budgeting and financial planning with interest only loans, which typically have lower initial payments than amortizing loans.

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 are the advantages of interest only loans?
A: Lower initial payments, improved cash flow in early years, and potential tax benefits (in some jurisdictions).

Q2: What are the disadvantages of interest only loans?
A: Principal balance doesn't decrease during interest-only period, larger payments later when principal repayment begins, and potential for payment shock.

Q3: How long do interest only periods typically last?
A: Interest only periods typically range from 5-10 years, after which the loan converts to a fully amortizing structure.

Q4: Are interest only loans suitable for everyone?
A: They are best suited for borrowers who expect higher income in the future or plan to sell the asset before the interest-only period ends.

Q5: What happens after the interest only period ends?
A: The loan typically converts to a standard amortizing loan, resulting in significantly higher monthly payments that include both principal and interest.