Interest-Only Loan Calculator

Understanding the interest-only loan calculator — concept and principle

With an interest-only loan, also called a bullet or balloon loan, you pay only the interest each month and repay the whole principal in one sum at the end. It is common for short-term business and property loans, bridging finance and some investment mortgages. This calculator shows the monthly interest, the total interest over the term, the lump sum due at maturity, the total paid, and the monthly payment on an equal-payment loan for comparison.

How it is calculated

• Monthly interest = loan amount × annual rate ÷ 12
• Total interest = monthly interest × 12 × years
• Balloon at maturity = the full loan amount
• Total paid = loan amount + total interest
• Equal-payment comparison = P × i ÷ (1 − (1 + i)^(−n)), with i = annual rate ÷ 12 and n = years × 12

The principle

Interest each month is charged on the balance owed. Because nothing is repaid, the balance never falls, so the interest charge is the same every month and adds up to simple interest on the full amount. An amortizing loan of the same size spreads the principal over the term, so its payment is much higher, but its balance shrinks each month and less interest builds up. The interest-only structure lowers cash outflow now in exchange for a large obligation later, which the borrower expects to meet from a sale, refinancing or other income.

Worked example

1. Loan $200,000, 6% a year, 5 years.
2. Monthly interest = 200,000 × 0.06 ÷ 12 = $1,000.00.
3. Total interest = 1,000 × 12 × 5 = $60,000.00.
4. Balloon at maturity = $200,000.00; total paid = $260,000.00.
5. An equal-payment loan over 5 years would cost 200,000 × 0.005 ÷ (1 − 1.005^(−60)) ≈ $3,866.56 a month.

How to read the result

The monthly saving against an amortizing loan, here about $2,867, is not free money; it is principal you still owe. Over the same five years the amortizing loan costs less in total interest (about $31,994) because the balance falls. An interest-only loan suits a borrower with a clear, reliable plan to repay the principal on time. Without one, the balloon becomes a refinancing risk if rates rise, property values fall or lending conditions tighten.

Common mistakes

• Comparing only the monthly payment with an amortizing loan.
• Assuming refinancing at maturity will be available on the same terms.
• Forgetting that a variable rate changes the monthly interest.

Frequently asked questions

What is the monthly interest on $200,000 at 6%?

$1,000, since 200,000 × 6% = 12,000 a year, divided by 12.

What happens at the end of the term?

The full principal is due; you repay it from savings or a sale, refinance it, or switch to repayments if the lender allows.

Is an interest-only loan cheaper?

No; for the same rate and term it costs more in total interest because the balance is never reduced.

Sources: Standard time value of money mathematics (simple interest and amortization) · U.S. Consumer Financial Protection Bureau, information on interest-only and balloon loans