An interest-only loan is a type of loan in which the borrower only pays the interest on the loan during a specified period, usually for the first few years of the loan term. This means that the borrower is not paying down the principal amount of the loan, but only paying the interest charged on the principal.
Additional instructions for the interest-only loan calculator
- Loan Amount: Enter the total amount of the loan you are taking out. This can be entered as a numerical value (e.g. 100000), with or without decimal places.
- Payment Amount: Enter the amount of each payment you will make to pay off the loan. This can be entered as a numerical value (e.g. 2500), with or without decimal places. If you are unsure of the payment amount, you can enter 0 and the calculator will calculate this value based on other inputs.
Note: You must enter one of the two above values and leave one value as 0, and the calculator will calculate the unknown value based on the entered value.
- Number of Payments: Enter the number of interest-only payments you will make.
- Annual Interest Rate: Enter the annual interest rate that will be charged on the loan. This must be entered as a percentage (e.g. 5%)
- Payment Frequency: Choose the frequency at which you will make payments. This can be monthly, weekly, bi-weekly, quarterly etc. Select the appropriate option from the drop-down list.
- Compounding: Choose the frequency at which interest will be compounded on the loan. If you do not know this value, then set it to equal the payment frequency.
Potential benefits of an interest-only loan
One benefit of an interest-only loan is that the monthly payments can be lower during the interest-only period, making it easier for borrowers to manage their cash flow. This can be particularly attractive to borrowers who expect their income to increase significantly or who have irregular income streams.
Risks of an interest-only loan
However, one major risk of an interest-only loan is that the borrower will have to pay a much larger monthly payment once the interest-only period ends, and the borrower must start paying down the principal. This can cause financial strain and may even lead to default if the borrower cannot make the higher payments.
Another risk of such a loan is that the borrower may end up owing more money than they initially borrowed, as they have not been paying down the principal during the interest-only period.
Interest-only loans are typically used for investment properties or in situations where the borrower expects to sell the property or refinance the loan before the interest-only period ends. It is important for borrowers to carefully consider their financial situation and goals before choosing an interest-only loan, and to fully understand the terms and risks associated with this type of loan
As the name states, with interest-only loans, the periodic payment amount pays only the interest due for the period. Of course, paying only interest results in smaller periodic payments until the final payment is due. The final payment includes the entire principal amount. When a consumer selects an interest-only loan, they are not paying down the loan's balance.
Note: Bonds represent debt, that is a loan to the bond's issuer. Frequently bonds pay only coupon interest, and thus they are interest only loans.
This calculator will solve for either one of two possible unknowns: "Amount of Loan" or the "Periodic Payment."
Enter a '0' (zero) for one unknown value.
The term (duration) of the loan is a function of the "Number of Payments" and the "Payment Frequency." If the loan is calling for monthly payments and the term is four years, then enter 48 for the "Number of Payments." If the payments are made quarterly, and the term is ten years, then enter 40 for the "Number of Payments."
Normally you would set the "Payment Method" to "Arrears" for a loan. This means that the monies are lent on one day, and the first payment isn't due until one period after the funds are received.
If the first payment is due on the day the funds are available, then set "Payment Method" to "Advance." This is typical for leases.