Home
Back
Interest Only Payment Formula:
| From: | To: |
Interest only payment refers to a loan payment structure where the borrower pays only the interest charges for a certain period, without reducing the principal balance. This is common in line of credit arrangements and certain mortgage products.
The calculator uses the interest only payment formula:
Where:
Explanation: The formula calculates the monthly interest payment by converting the annual rate to a monthly rate and applying it to the principal balance.
Details: Understanding interest only payments helps borrowers budget for line of credit expenses, compare different credit options, and make informed financial decisions about debt management.
Tips: Enter the principal amount in currency units and the annual interest rate as a percentage. Both values must be positive numbers to calculate valid results.
Q1: What is an interest only line of credit?
A: An interest only line of credit allows borrowers to pay only the interest charges for a specified period, typically with flexible repayment terms and revolving credit availability.
Q2: How does interest only differ from principal and interest payments?
A: Interest only payments cover only the interest charges, while principal and interest payments reduce both interest and the outstanding loan balance.
Q3: What are the advantages of interest only payments?
A: Lower initial payments, improved cash flow management, and flexibility for borrowers who expect higher income in the future or are using credit for short-term needs.
Q4: What are the risks of interest only payments?
A: The principal balance doesn't decrease during the interest only period, and payments may increase significantly when principal repayment begins.
Q5: How long can interest only payments typically last?
A: Interest only periods vary by lender but typically range from 1-10 years, after which the loan converts to principal and interest payments.