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 at the end of the loan term. This structure results in lower initial payments compared to traditional amortizing loans.

2. How Does the Calculator Work?

The calculator uses these simple formulas:

Where:

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

Explanation: The monthly payment consists only of the interest on the principal. The full principal amount remains unchanged and is due at the end of the loan term.

3. Importance of Interest Only Loan Calculation

Details: Understanding the payment structure is crucial for financial planning, as borrowers need to prepare for the large balloon payment of the principal at the end of the term.

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%). All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What are common uses for interest-only loans?
A: They're often used for short-term financing, investment properties, or by borrowers who expect higher future income.

Q2: What happens at the end of the interest-only period?
A: The borrower must repay the full principal amount, refinance the loan, or convert to a traditional amortizing loan.

Q3: Are interest-only loans risky?
A: They can be, as they require discipline to save for the principal payment and depend on future financial stability or property values.

Q4: How is the monthly interest rate calculated from APR?
A: Divide the annual percentage rate (APR) by 12 (months) to get the monthly rate in decimal form.

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