1. What is Interest Only Payment?

An interest-only payment is a loan payment where only the interest is paid for a certain period, with no payment toward the principal balance. This results in lower initial payments compared to amortizing loans.

2. How Does the Calculator Work?

The calculator uses the interest-only payment formula:

Where:

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

Explanation: The formula calculates the monthly interest payment by multiplying the principal amount by the monthly interest rate.

3. Importance of Interest Only Calculation

Details: Understanding interest-only payments helps borrowers evaluate loan options, plan cash flow, and compare different loan structures.

4. Using the Calculator

Tips: Enter the principal amount in USD and annual interest rate as a percentage. Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What types of loans offer interest-only payments?
A: Common in mortgages, student loans, and some business loans, typically for an initial period (e.g., 5-10 years).

Q2: What happens after the interest-only period ends?
A: Payments typically increase significantly as they begin to include both principal and interest.

Q3: Does the principal decrease during interest-only period?
A: No, the principal remains unchanged unless additional payments are made.

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

Q5: What are the risks of interest-only loans?
A: Higher payments later, no equity buildup initially, and potential for negative amortization if rates rise.