How this calculator works
On an interest-only loan you pay only the interest for a set period, so the balance doesn't go down. Simple interest-only payment = loan amount × rate ÷ 12. When the interest-only period ends, the full balance is repaid over the rest of the term, so the payment rises. This calculator is for HELOCs, business, bridge, construction and personal loans; for a home loan with taxes and insurance use the interest-only mortgage calculator in the /mortgage/ section.
- Interest-only payment = loan amount × rate ÷ 12.
- Payment after the interest-only period = amount × r × (1 + r)^n ÷ ((1 + r)^n − 1), with r = rate ÷ 12 and n = months of repayment.
- Total interest = interest-only payment × interest-only months + (payment after × repayment months − amount).
Worked example
With these inputs: loan amount $50,000; interest rate 8%; interest-only period 3; repayment period after that 10.
The result is interest-only payment $333.33, with interest paid in the interest-only period $12,000.00 and payment after year 3 $606.64. The payment rises by $273.30 a month when principal repayment starts. Budget for the higher payment from day one, or pay extra principal during the interest-only years.
How an interest-only loan works
During the interest-only period you pay only the interest, so the balance doesn't go down. When the period ends, the full balance has to be repaid over the time that's left, which makes the payment jump. In the example it rises by $273.30 a month. With no repayment period at all, the whole amount is due at the end as a balloon payment.
HELOCs work this way during the draw period, and so do many business, bridge and construction loans. For a home mortgage with taxes and insurance, use the interest-only mortgage calculator in our mortgage section.
What interest-only really costs
Because the balance stays high for longer, you pay more interest overall than on a loan that amortizes from day one. The rate table under the result shows the interest-only payment and the later payment at five rates, so you can see how much a rate change moves each.
Paying some principal during the interest-only years lowers the jump later. Any extra goes straight to the balance; the extra payment calculator shows what it saves once the loan amortizes.
Budget for the higher payment now
Plan the budget around the payment after the interest-only period, not the low one. Check it fits with the debt-to-income ratio calculator and the can I afford this bill calculator, and save the difference until the reset date.
Sources
Frequently asked questions
How do you calculate an interest-only payment?
Multiply the loan amount by the annual rate and divide by 12. A $50,000 loan at 8%: 50,000 × 0.08 ÷ 12 = $333.33 a month. At 7.5%, $100,000 is $625.00 a month.
What happens when the interest-only period ends?
You start repaying principal over the time that's left, so the payment rises. A $50,000 loan at 8% goes from $333.33 to $606.64 a month when 10 years of repayment start.
Does an interest-only loan cost more?
Yes, over the life of the loan. In the example, 3 years interest-only and 10 years of repayment cost $4,216.79 more interest than a regular 13-year loan.
Can I pay principal on an interest-only loan?
Usually yes. Extra payments lower the balance, so the interest-only payment and the later payment both go down. Check the loan has no prepayment penalty.
What is a balloon payment?
A large final payment of the remaining balance. If an interest-only loan has no repayment period, the whole loan amount is due at the end.