Amortization Calculator for Interest-Only Payments

An amortization calculator can estimate an interest-only payment when you enter the loan amount and annual interest rate; this calculator also shows the interest paid over the stated term. It assumes a fixed rate and monthly payments, and does not model a later repayment of principal.

Formula

For an interest-only payment, the monthly payment covers the interest that accrues during one month; it does not reduce the loan principal. The calculation is:

Monthly interest-only payment = P × (APR ÷ 1200)

• P is the loan principal, in dollars.
• APR is the annual interest rate entered as a percentage, such as 8 for 8% per year.
• APR ÷ 1200 converts the annual percentage to a monthly decimal rate: divide by 100 to convert percent to a decimal, then by 12 for a monthly rate.

Total interest is the monthly payment multiplied by the number of monthly payments: Total interest = monthly payment × years × 12. This assumes the same payment is made every month and that the principal remains unchanged throughout the entire term. The displayed payment is rounded to cents before the total is calculated.

Worked Example

Using the calculator’s default inputs—$20,000 principal, 8% APR, and a five-year term:

1. Convert the annual percentage to a monthly decimal rate: 8 ÷ 1200 = 0.0066667.
2. Calculate monthly interest: $20,000 × 0.0066667 = $133.3333, or $133.33 per month after rounding to cents.
3. Find the number of monthly payments: 5 × 12 = 60.
4. Calculate total interest using the rounded monthly payment: $133.33 × 60 = $7,999.80.

These figures represent the interest payments only. The $20,000 principal remains outstanding, so the total amount paid does not include repayment of that balance.

Assumptions

• The interest rate is fixed for the full term.
• Payments are made monthly, with the calculation treating each payment as covering one month’s interest.
• Interest is calculated monthly using APR ÷ 12, expressed as a decimal.
• Fees, taxes, insurance, mortgage insurance, escrow, and any balloon or principal payment are not included.

How Interest-Only Payments Work

With a standard fully amortizing loan, each scheduled payment generally covers interest and repays some principal. As principal falls, the interest portion is calculated on a smaller balance. An interest-only payment works differently: it pays the period’s interest while leaving the principal unchanged. Therefore, this calculator does not use the usual amortizing-payment formula, which spreads principal repayment across a set number of payments.

The word “amortization” can still appear in a loan’s description even if its initial payment period is interest-only. A loan may have separate phases, such as an initial interest-only period followed by payments that include principal. This calculator isolates the interest-only phase; it does not calculate the payment required in a later phase. That later payment depends on details such as the remaining balance, the length of the repayment phase, and the rate that applies then.

When to Use This Estimate

Use an interest-only calculation to estimate the monthly interest charge on a fixed principal at a stated annual rate. It can help explain how the payment changes when the principal or rate changes, or provide a simple check against an interest-only figure in loan paperwork. Enter the rate and loan amount provided for the specific loan; the default values are illustrative, not a statement about available rates or terms.

• Increasing the principal increases the calculated payment in direct proportion.
• Increasing the APR increases the monthly interest payment in direct proportion.
• Changing the term does not change the monthly interest payment in this model, but it changes the total interest because it changes the number of payments.

For example, holding the principal and rate constant while extending the term leaves the monthly estimate unchanged but increases the sum of monthly interest payments. It does not mean the balance is being paid off: principal repayment must be accounted for separately.

What the Results Do—and Do Not—Show

The monthly result is an estimate of interest for a month at the entered rate. The total-interest result assumes that the same payment is made for every month of the full term. Since each payment is rounded to cents before the total is multiplied, the total can differ slightly from a calculation that keeps unrounded amounts until the end.

Actual loan statements may use daily interest accrual, different payment dates, a changing rate, or other contract-specific calculations. A variable rate can make future interest payments differ from this fixed-rate estimate. A payment schedule may also require principal repayment after the interest-only period or a larger final payment. Those amounts are not included in the displayed total.

Do not read “total interest” as the total amount needed to repay the loan. In the example, the calculated interest is $7,999.80, but the $20,000 principal is still due under the model. Adding principal repayment, charges, and any other loan costs requires figures and terms that this calculator does not collect.

Common Mistakes and Limits

• Entering a decimal instead of a percentage: enter 8 for 8% APR, not 0.08. The formula converts the percentage internally.
• Assuming the payment reduces principal: under this calculation, the outstanding principal stays the same. Paying only the stated amount does not amortize the balance.
• Treating the term as the interest-only period: use the number of years for the period being modelled. If the loan switches payment structure, calculate that next phase separately.
• Confusing APR with a monthly rate: the input is an annual percentage rate. Entering a monthly rate as though it were annual will produce a misleading estimate.

The formula is a simplified monthly estimate, not a schedule generated from a particular loan contract. It does not account for fees, payment timing differences, rate changes, or principal reduction. For exact amounts and the full repayment schedule, use the loan’s stated terms and payment disclosures.

Frequently Asked Questions

Does an interest-only payment reduce the loan balance?
No. In this calculator, the payment covers interest only, so the principal remains unchanged. A separate principal payment would be needed to reduce the balance.

How do I calculate an interest-only monthly payment?
Multiply the principal by the annual percentage rate divided by 1,200. For example, at 8% APR, the monthly rate used is 8 ÷ 1,200.

Why does the term change total interest but not the monthly payment?
The monthly estimate depends on the principal and rate, not the number of months. A longer term means more monthly interest payments, so the modeled total interest rises.

Does an interest-only loan eventually require principal repayment?
The calculator cannot determine that from the inputs provided. A loan’s contract may specify a later principal-and-interest phase or another repayment arrangement; check the loan documents for its schedule.

Is this the same as an amortization calculator payment?
No. A standard amortization payment is designed to repay principal and interest over a set term. This interest-only estimate covers interest while leaving principal outstanding.

This result is an estimate, and the lender’s disclosure gives the exact figures.

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in p | Loan amount | $ | 20000 | 1 | 100000000
in apr | Interest rate (APR) | % | 8 | 0.01 | 100
in yrs | Loan term | years | 5 | 0.0833 | 50
out pmt | Monthly payment | $ | p * (apr / 1200) | 2
out int | Total interest | $ | pmt * yrs * 12 | 2