Interest-Only Loan Calculator: Calculation and Examples
Calculate the initial interest-only payment and the later payment needed to repay principal within the total term.
Understanding the calculation
During the interest-only period, payments cover interest without reducing principal. After that period, the full balance is amortized over the remaining months. The model assumes a fixed interest rate and no balloon payment.
Interest-Only Loan formula
Interest-only payment = principal × annual rate ÷ 1,200. Later payments amortize that principal across the remaining repayment months.
Worked example
A $100,000 balance at 6% has a $500 monthly interest-only payment. Principal stays at $100,000 until principal repayments begin.
Assumptions and interpretation
Repayment estimates use fixed interest and equal monthly periods. No fees, rate changes, new borrowing, missed payments, or penalties are added. Interest accrues on the remaining balance, and the last modeled payment is capped at the amount owed.
Displayed amounts are rounded; intermediate calculations use unrounded values. Compare the result with the terms and payment schedule in your agreement. For background on the calculation, read the CFPB explanation of interest-only loans.
Frequently asked questions
What happens when the interest rate is zero?
No interest is added. Payments reduce principal directly, so a fixed term divides principal equally and a fixed payment determines how many months repayment takes.
Why might the actual result differ?
Payment timing, daily interest accrual, contract rounding, fees, and changing rates can differ from the monthly estimate. Check the lender or issuer’s agreement for the method used.
What inputs should I enter?
Use amounts and rates from the relevant agreement, with time periods matching the labels. Enter zero for an optional amount that does not apply.