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 set period, with the principal amount due as a lump sum at the end of the loan term. This structure is common in certain mortgages and business loans.

2. How Does the Calculator Work?

The calculator uses these simple formulas:

Where:

• \( P \) — Principal loan amount (USD)
• \( r \) — Monthly interest rate (annual rate ÷ 12)
• \( PMT \) — Monthly interest payment (USD)

Explanation: Each month you pay only the interest accrued, and at the end of the term you repay the full principal amount.

3. Understanding the Amortization

Details: Unlike traditional loans, the principal balance doesn't decrease during the interest-only period. The amortization table will show consistent interest payments each month with no principal reduction until the final payment.

4. Using the Calculator

Tips: Enter the principal amount in USD, annual interest rate as a percentage (e.g., 5 for 5%), and loan term in years. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: Who typically uses interest-only loans?
A: They're often used by investors expecting asset appreciation, or borrowers needing lower initial payments.

Q2: What are the risks of interest-only loans?
A: The main risk is the large balloon payment at the end, which requires refinancing or sale of the asset.

Q3: Can the term be extended?
A: Some loans allow extension of the interest-only period, but this depends on the lender's terms.

Q4: Are payments tax-deductible?
A: For mortgages, interest payments may be deductible (consult a tax professional).

Q5: What happens if I can't pay the principal at term end?
A: You may need to refinance or sell the asset, or risk default if no other options are available.