1. What is Interest Only Payment?

Interest only payment is a loan payment structure where the borrower pays only the interest portion of the loan for a specified period, without reducing the principal balance. This calculator uses the 365/360 day count convention commonly used in commercial lending.

2. How Does the Calculator Work?

The calculator uses the interest only payment formula:

Where:

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

Explanation: The formula calculates the monthly interest payment based on the annual interest rate divided by 12 months, using the 365/360 day count method which assumes 30-day months for calculation purposes.

3. Importance of Interest Only Payment Calculation

Details: Accurate interest only payment calculation is crucial for financial planning, loan structuring, and understanding the true cost of borrowing during the interest-only period of a loan.

4. Using the Calculator

Tips: Enter the principal amount in currency units and the annual interest rate as a percentage. Both values must be valid (principal > 0, rate ≥ 0).

5. Frequently Asked Questions (FAQ)

Q1: What is the 365/360 day count method?
A: The 365/360 method calculates interest by assuming 30-day months (360 days per year) while using the actual daily rate based on 365 days per year, resulting in slightly higher interest charges.

Q2: When are interest only payments commonly used?
A: Interest only payments are often used in commercial real estate loans, construction loans, and some adjustable-rate mortgages during an initial period.

Q3: What happens after the interest only period ends?
A: After the interest only period, payments typically increase significantly as they must cover both principal and interest to fully amortize the loan by its maturity date.

Q4: Are there advantages to interest only payments?
A: Interest only payments can provide lower initial payments, improving cash flow in the short term, but result in higher total interest costs over the life of the loan.

Q5: How does 365/360 differ from actual/365 calculation?
A: The 365/360 method results in slightly higher interest charges than actual/365 because it calculates daily interest as if there were 360 days per year but applies it to actual calendar days.