How to Calculate Interest Only Loan
What is Interest Only Loan?
An interest-only loan requires only interest payments for a fixed period, with no principal reduction. Monthly payments are lower initially, but you owe the full principal at the end of the interest-only period (or when payments revert to principal + interest).
Formula
Step-by-Step Guide
- 1Monthly interest payment = Principal × (Annual rate / 12)
- 2No principal reduction during interest-only period
- 3At end of interest-only period: either repay principal in full, or switch to amortising payments
- 4Total cost is higher than a standard amortising loan
Worked Examples
Frequently Asked Questions
What is Interest Only Loan?
An interest-only loan requires only interest payments for a fixed period, with no principal reduction. Monthly payments are lower initially, but you owe the full principal at the end of the interest-only period (or when payments revert to principal + interest)
How accurate is the Interest Only Loan calculator?
The calculator uses the standard published formula for interest only loan. Results are accurate to the precision of the inputs you provide. For financial, medical, or legal decisions, always verify with a qualified professional.
What units does the Interest Only Loan calculator use?
This calculator works with inches. You can enter values in the units shown — the calculator handles all conversions internally.
What formula does the Interest Only Loan calculator use?
The core formula is: Monthly interest payment = Principal × (Annual rate / 12). Each step in the calculation is shown so you can verify the result manually.