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. This results in lower initial payments but requires repayment of the full principal at the end of the term or conversion to a standard amortizing loan.

2. How Does the Calculator Work?

The calculator uses the interest-only loan formula:

Where:

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

Explanation: The payment covers only the interest accrued each month, with no reduction in principal during the interest-only period.

3. Understanding the Results

Details: The calculator shows your monthly interest payment and the total interest you'll pay over the loan term. Remember that the principal remains unpaid during the interest-only period.

4. Using the Calculator

Tips: Enter the loan amount in dollars, annual interest rate as a percentage (e.g., 5.25), and loan term in years. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: When are interest-only loans typically used?
A: Common for short-term financing, investment properties, or when borrowers expect higher future income.

Q2: What happens after the interest-only period ends?
A: The loan typically converts to a standard amortizing loan with higher payments, or a balloon payment may be due.

Q3: Are interest-only loans riskier?
A: They can be, as they delay principal repayment and may lead to payment shock when payments increase.

Q4: Can I pay principal during the interest-only period?
A: This depends on the loan terms - some allow voluntary principal payments, others don't.

Q5: How does this differ from an amortizing loan?
A: In amortizing loans, payments include both principal and interest, reducing the balance over time.