1. What is Interest Only Payment?

An interest-only payment is a loan payment where you only pay the interest charges for the period, without reducing the principal balance. This results in lower initial payments but no equity buildup.

2. How Does the Calculator Work?

The calculator uses the interest-only payment formula:

Where:

• \( Principal \) — Original loan amount ($)
• \( Rate \) — Annual interest rate (as decimal)

Explanation: The annual rate is divided by 12 to get the monthly rate, which is then multiplied by the principal to get the monthly interest payment.

3. Importance of Interest Only Payments

Details: Interest-only payments are common in certain loan types (like some mortgages or business loans) where borrowers want lower initial payments, but it's important to understand they don't reduce the principal balance.

4. Using the Calculator

Tips: Enter the principal amount in dollars and the annual interest rate as a decimal (e.g., 5% = 0.05). Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: When are interest-only payments used?
A: Common in adjustable-rate mortgages, some business loans, and during construction periods of loans.

Q2: What happens after the interest-only period ends?
A: Payments typically increase significantly as you must start paying both principal and interest.

Q3: Are interest-only loans risky?
A: They can be, as you're not building equity and may face payment shock when the interest-only period ends.

Q4: How does this differ from a regular loan payment?
A: Regular amortizing loans include both principal and interest in each payment, reducing the balance over time.

Q5: Can I pay extra principal during interest-only period?
A: This depends on the loan terms - some allow it, others may have prepayment penalties.