Loan Amortization Calculator for Interest-Only Payments

This loan amortization calculator estimates a fixed monthly payment that pays interest only on a loan balance; it does not reduce the principal. Enter the loan amount, annual interest rate, and term to see the monthly interest payment and total interest over that term.

Formula

An interest-only payment covers the interest charged for one payment period. With an annual percentage rate expressed as a percentage, the monthly rate is the APR divided by 1,200. The monthly interest-only payment is:

Payment = P × (APR / 1,200)

• P is the principal, or amount borrowed, in dollars.
• APR is the annual interest rate entered as a percentage, such as 8 for 8% per year.
• APR / 1,200 is the monthly rate as a decimal.
• Total interest here is the monthly payment multiplied by the number of months in the entered term: payment × years × 12.

This calculator assumes the rate and payment remain unchanged for the entire entered term. Unlike a standard amortizing-payment formula, the interest-only formula does not include a principal repayment amount in each monthly payment.

Worked Example

Using the calculator’s defaults: a $20,000 balance, 8% APR, and a five-year term.

1. Convert the annual rate to a monthly decimal: 8 / 1,200 = 0.0066667.
2. Multiply by principal: $20,000 × 0.0066667 = $133.3333, which rounds to $133.33 per month.
3. Find the number of monthly payments in the term: 5 × 12 = 60.
4. Multiply the rounded monthly payment by the number of months: $133.33 × 60 = $7,999.80 in total interest.

The principal remains $20,000 throughout this simplified interest-only period. The total interest is based on the displayed, cent-rounded payment, so it can differ slightly from a total calculated with unrounded values.

Assumptions

• The interest rate is fixed for the full term; a variable rate is not modelled.
• Payments occur monthly, and the balance accrues interest at the APR divided by 12.
• The calculation treats monthly interest as paid when due and assumes no principal payments or changes to the balance.
• Fees, taxes, insurance, PMI, escrow, missed payments, and payment-date effects are not included.

How Interest-Only Payments Work

In a typical amortizing loan, each scheduled payment covers interest and also repays some principal. As the balance falls, later interest charges generally fall too, assuming the same rate and payment schedule. An interest-only payment works differently: it pays the period’s interest charge, leaving the principal unchanged.

That distinction explains why a loan can have a relatively small payment during an interest-only period yet still have the full borrowed balance outstanding afterward. If a contract later requires principal repayment, payments may rise, or a remaining balance may become due, depending on the contract. The calculator does not predict or model those later terms; check the loan documents for the payment schedule and any change dates.

For example, at 8% APR, the monthly interest on a $20,000 unchanged balance is about $133.33 under the calculator’s monthly-rate assumption. Paying that amount covers the calculated interest for the period, but does not pay down the $20,000 balance.

When to Use This Calculator

Use this estimate to understand the interest-only portion of a loan when you know its principal, annual rate, and the length of the period you want to examine. It can help separate the cost of interest from principal repayment when reviewing a stated payment schedule or comparing an interest-only phase with an amortizing-payment estimate.

• Enter the amount of principal that will accrue interest. If the balance changes because of draws or repayments, a single fixed-balance estimate will not represent every month.
• Use the APR as a percentage, not a decimal: enter 8 for 8%, rather than 0.08.
• Enter the length of the period in years. The calculator converts it to months by multiplying by 12.
• Compare the calculator’s result with the lender’s stated payment and ask about differences such as fees, daily interest, rate changes, or a different payment schedule.

Interest-Only Versus Amortizing Payments

An interest-only payment is not the same as a fully amortizing payment. A fully amortizing payment is calculated to repay both interest and all principal over a specified term, assuming the payment amount, rate, and timing follow the formula’s assumptions. The interest-only calculation shown here covers interest alone; it has no scheduled reduction of principal.

Consequently, the interest-only total in this calculator is not the total cost of repaying a loan. It excludes any principal payment, any later payment increase, and any final balance payment. Nor does the monthly figure automatically represent the amount due under a particular contract: actual terms can include a different rate basis, fees, changing balances, or other provisions.

Common Limits and Mistakes

• Confusing APR with the monthly rate: The formula divides the percentage APR by 1,200. Multiplying the principal directly by 8% would give annual interest at 8%, not a monthly payment.
• Assuming principal is repaid: A payment that covers only interest leaves principal unchanged. Check whether the schedule includes a separate principal payment or a later repayment phase.
• Treating the result as a full loan cost: The total-interest output covers only the entered period with a fixed balance and rate. It is not a payoff amount or a complete repayment total.
• Rounding differences: The monthly output is rounded to cents, and total interest uses that displayed payment. A lender may calculate interest using more precise daily balances or another convention.

The formula is a simplified estimate, not a substitute for the payment schedule in loan disclosures. Obtain the actual rate, balance, payment dates, and any later payment terms from the lender rather than assuming the calculator includes them.

Frequently Asked Questions

How do I calculate an interest-only loan payment?
Multiply the principal by the monthly interest rate. For an APR stated as a percentage, the monthly rate is APR ÷ 1,200; for example, $20,000 at 8% gives about $133.33 a month.

Does an interest-only payment reduce the loan balance?
Not under the assumption used here. It covers interest only, so the principal stays unchanged unless a separate principal payment is made.

Is an interest-only payment lower than an amortizing payment?
It can be, because the interest-only amount does not include scheduled principal repayment. The exact payments depend on the principal, rate, term, and contract terms.

What happens when an interest-only period ends?
The next payment arrangement depends on the loan contract. It may begin including principal, change in another way, or require a balance payment; review the written schedule for the applicable terms.

Why does my lender’s interest-only payment differ from this estimate?
Possible reasons include a changing balance or rate, daily rather than simplified monthly interest calculations, fees, payment dates, or rounding. Ask the lender how its stated amount is calculated.

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

Related

• APR Calculator: The True Rate of a Loan With Fees
• Simple Interest Loan Calculator: I = P × r × t
• Interest-Only Loan Calculator: Payment During and After the Interest-Only Period

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 interest-only payment | $ | p * (apr / 1200) | 2
out int | Total interest over term | $ | pmt * yrs * 12 | 2