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Interest Only Payment Formula:
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Interest only payment refers to 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 results in lower initial payments compared to amortizing loans.
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 amount.
Details: Calculating interest only payments helps borrowers understand their minimum payment obligations during the interest-only period, plan cash flow, and compare different loan options. It's commonly used in interest-only mortgages, lines of credit, and certain business loans.
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).
Q1: What are the advantages of interest only payments?
A: Lower initial payments, improved cash flow management, and potential tax benefits (in some jurisdictions) for investment properties.
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 for mortgages, after which the loan converts to fully amortizing payments.
Q4: Are interest only payments suitable for everyone?
A: They are best for borrowers with irregular income, investors expecting property appreciation, or those who plan to sell before the interest-only period ends.
Q5: What happens at the end of the interest only period?
A: The loan either requires a balloon payment (full principal) or converts to amortizing payments that include both principal and interest.