Use this interest-only loan calculator to estimate the initial payment, later principal-and-interest payment, total interest, and affordable principal.
Interest-Only Loan Formula
The monthly interest-only payment is:
M_IO = P * r
When principal repayment begins, the payment becomes:
M_PI = P * r / [1 - (1 + r)^(-n)] At r = 0: M_PI = P / n
Variables:
- M_IO is the interest-only monthly payment
- M_PI is the later principal-and-interest payment
- P is the principal balance
- r is the monthly rate: annual nominal percentage rate divided by 1,200
- n is the number of repayment months after the interest-only period
This fixed-rate USD estimate excludes fees, taxes, insurance, extra principal and lender installment-rounding rules. Enter an explicit interest-only period and a repayment period containing a whole number of months. The calculator assumes the full principal remains outstanding during the interest-only phase. It shows the payment change, estimated interest in both phases, and total payments. Payment-budget mode solves for the principal supported by the selected later principal-and-interest payment.
Interest-Only Payment Reference
Interest-only loans shift principal repayment into a shorter later period. This can create a substantial increase in the required payment.
| Loan feature | During interest-only period | After interest-only period | Main risk |
|---|---|---|---|
| Principal balance | Usually unchanged | Begins amortizing | Large balance remains |
| Monthly payment | Interest only | Principal plus interest | Payment shock |
| Total interest | Accumulates without principal reduction | Continues while balance declines | Higher lifetime cost |
| Extra principal | Optional if allowed | Reduces future payments or term | Contract rules vary |
Example Problems
Example 1: Calculate both payment phases.
A $75,000 loan has a 7% rate and a 24-month interest-only period, followed by 10 years of amortizing payments. The interest-only payment is $75,000 × 0.07 ÷ 12. After month 24, the full $75,000 is amortized over 120 months at the same rate.
Example 2: Find the maximum principal.
If the later payment budget is $850, enter the rate and repayment period and select the principal mode. The calculator discounts the later payment stream to find the maximum principal, then shows the smaller interest-only payment that would apply first.
Frequently Asked Questions
Does an interest-only payment reduce principal?
Not under the basic structure. It pays only the interest due for that period. Extra principal payments may reduce the balance when the contract permits them.
Why does the payment rise later?
The principal still has to be repaid, but it is now spread over fewer remaining months. The later payment therefore includes both interest and enough principal to finish by the end of the repayment period.
Can the rate change?
Some interest-only loans have adjustable rates. This calculator assumes one fixed rate, so test additional rate scenarios when the actual rate can reset.
