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 balance remaining unchanged during this time. These loans are common in certain mortgage and investment scenarios.

2. How Does the Calculator Work?

The calculator uses the interest-only loan formula:

Where:

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

Explanation: The payment is simply the principal multiplied by the monthly interest rate. No principal is paid down during the interest-only period.

3. Importance of Interest Only Payments

Details: Understanding interest-only payments helps borrowers plan cash flow during the interest-only period and prepare for when principal payments begin.

4. Using the Calculator

Tips: Enter the principal amount in USD and the monthly interest rate as a decimal (e.g., 0.005 for 0.5%). Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What types of loans offer interest-only payments?
A: Some mortgages, home equity lines of credit (HELOCs), and certain business loans may have interest-only periods.

Q2: What happens after the interest-only period ends?
A: Payments typically increase to include both principal and interest, often resulting in significantly higher payments.

Q3: Are interest-only loans a good idea?
A: They can be beneficial for certain situations like short-term ownership or investment properties, but carry risks as the principal isn't being paid down initially.

Q4: How do I convert APR to monthly rate?
A: Divide the annual percentage rate (APR) by 12 (for monthly payments). For example, 6% APR = 0.06/12 = 0.005 monthly rate.

Q5: Can I pay principal during the interest-only period?
A: This depends on the loan terms - some allow voluntary principal payments while others may charge prepayment penalties.