1. What is Interest Only Loan?

An interest-only loan is a type of loan where the borrower pays only the interest for a certain period, with the principal balance remaining unchanged during this time.

2. How Does the Calculator Work?

The calculator uses the simple interest formula:

Where:

• \( PV \) — Present value or principal amount (USD)
• \( r \) — Interest rate (in decimal form)

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

3. Importance of Interest Calculation

Details: Understanding interest-only payments helps borrowers plan their finances during the interest-only period before principal payments begin.

4. Using the Calculator

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

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between interest-only and amortizing loans?
A: Interest-only loans require only interest payments initially, while amortizing loans include both principal and interest in each payment.

Q2: How do I convert APR to decimal?
A: Divide the percentage by 100 (e.g., 5% = 0.05).

Q3: Are interest-only loans common?
A: They're often used for mortgages, student loans, and some business loans, typically with a fixed interest-only period.

Q4: What happens after the interest-only period ends?
A: Payments typically increase as they start including principal repayment, or the full balance may become due (balloon payment).

Q5: Are there risks with interest-only loans?
A: Yes, borrowers may face payment shock when principal payments begin, and they don't build equity during the interest-only period.