How interest-only payments are worked out
During the interest-only period, each payment is the balance times the note rate divided by 12, so the principal doesn't go down. After it ends, the loan amortizes over the remaining term, so the payment rises.
Worked example
A $25,000 loan at 9% over 10 years, interest only for 3, costs $187.50 a month, then $402.23 a month for 7 years. Interest totals $15,537.06.
Fully amortizing from the start, you'd pay $316.69 a month and $13,002.73 of interest, so the interest-only years add $2,534.33.
Payment shock and balloons
The jump when principal payments begin is often called payment shock. If the interest-only period runs the whole term, you owe the full principal as a balloon payment at the end.
What this calculator assumes
A fixed note rate and monthly payments. Many interest-only mortgages and HELOCs have adjustable rates, which change the payments.
Borrowing in the UK?
The country choices above the inputs open separate local pages. UK lenders quote an APR that already includes compounding. Choosing United Kingdom opens that page and resets the inputs; amounts are not converted.
For a loan from a UK lender, use the UK interest only calculator in pounds.
Inputs for the US interest only loan calculator
Amount borrowed
How much you're borrowing, in US dollars.
Interest rate
The yearly note rate from your offer, charged at one twelfth each month.
Full loan term
How long the whole loan runs, including the interest-only years.
Interest-only period
The years you pay only interest. Set it to the full term for a loan repaid in one lump at the end.
CALCULATOR QUESTIONS
US interest only loan calculator questions
How do you calculate an interest-only payment?
Multiply the balance by the note rate and divide by 12. $25,000 at 9% is $187.50 a month.
What is payment shock?
The rise in your payment when the interest-only period ends and you start paying principal over the remaining term.
Do interest-only loans cost more?
Yes, overall. The principal stays high for longer, so you pay more total interest than on a fully amortizing loan.
Can I pay extra principal during the interest-only period?
Usually, if your note allows prepayment. It lowers the balance, so later payments and interest fall.