1. What is Interest Only Payment?

An interest-only payment is a loan payment that consists only of the interest due on the principal balance, with no repayment of principal. This type of payment is common in certain loan structures where principal repayment is deferred.

2. How Does the Calculator Work?

The calculator uses the simple interest formula:

Where:

• \( Principal \) — Original loan amount in dollars
• \( Rate \) — Annual interest rate in decimal form (e.g., 0.05 for 5%)

Explanation: The calculation multiplies the principal amount by the interest rate to determine the annual interest payment.

3. Importance of Interest Only Calculation

Details: Understanding interest-only payments helps borrowers plan cash flow, especially for loans with deferred principal repayment periods. It's commonly used in some mortgages, business loans, and bridge financing.

4. Using the Calculator

Tips: Enter the principal amount in dollars and the annual interest rate in decimal form (e.g., 0.075 for 7.5%). Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between interest-only and amortizing payments?
A: Interest-only payments cover just the interest due, while amortizing payments include both principal and interest, reducing the loan balance over time.

Q2: How do I convert percentage rate to decimal?
A: Divide the percentage by 100 (e.g., 6.5% becomes 0.065).

Q3: Are interest-only loans good or bad?
A: They can be beneficial for short-term financing or when expecting higher future income, but they don't build equity and may lead to payment shock when principal repayment begins.

Q4: What happens after the interest-only period ends?
A: Typically, the loan converts to fully amortizing payments (principal + interest) or may require a balloon payment.

Q5: Can this calculator be used for monthly payments?
A: This calculates annual payments. For monthly, divide the result by 12.