Interest-only loan calculator

What is an interest-only loan calculator?

An interest-only loan calculator is a free online tool that shows what you pay each month while a loan is in its interest-only phase, what the payment jumps to once that phase ends, and how much interest the loan costs in total. You enter the loan amount, the annual interest rate, the length of the interest-only period, and the total loan term, and the calculator returns the interest-only monthly payment, the amortizing monthly payment that follows, and the total interest paid over the life of the loan.

Why interest-only loans work differently

With a normal amortizing loan, every payment covers both interest and a slice of the principal, so the balance falls steadily from the first month. An interest-only loan splits the term into two stages. During the interest-only period you pay only the interest that accrues, so the balance does not move and the payment is low. When that period ends, the full balance has to be repaid over the remaining months, so the payment rises sharply. Because you delay paying down principal, you pay interest on the whole balance for longer, which raises the total interest compared with amortizing from day one.

How does the interest-only loan calculator work?

You provide four pieces of information:

• The loan amount (the sum you borrow).
• The annual interest rate, as a percentage.
• The interest-only period, in years.
• The total loan term, in years.

The calculator converts the annual rate into a monthly rate. It multiplies the loan amount by that monthly rate to find the interest-only payment. It then counts the months left after the interest-only period and applies the standard amortization formula to repay the full balance over those months, giving the payment for the second stage. Finally it adds the interest from both stages to report the total interest paid.

Formula

The monthly interest rate is the annual rate divided by 12:

$r = \frac{\text{annual rate}}{100 \times 12}$

During the interest-only period the monthly payment is just the interest on the balance:

$M_{IO} = P \cdot r$

After the interest-only period ends, the balance $P$ is repaid over the remaining $n$ months, where $n = (\text{total term} - \text{interest-only period}) \times 12$. The amortizing payment $M$ is:

$M = \frac{P \cdot r}{1 - (1 + r)^{-n}}$

When the interest rate is zero, this simplifies to:

$M = \frac{P}{n}$

With $m$ interest-only months, the total interest paid over the whole loan is:

$\text{Total interest} = M_{IO} \cdot m + (M \cdot n - P)$

Worked examples

1. A loan of 300,000 at a 6% annual rate, with a 5-year interest-only period and a 30-year total term:

   • Monthly rate $r$ = 0.06 / 12 = 0.005
   • Interest-only payment $M_{IO}$ = 300000 × 0.005 = 1,500 per month
   • After 5 years the balance amortizes over the remaining 25 years (300 months):

   $M = \frac{300000 \cdot 0.005}{1 - (1.005)^{-300}} \approx 1{,}932.90$

   The total interest is 1,500 × 60 + (1,932.90 × 300 − 300,000) = 90,000 + 279,870 = 369,870.

2. The same loan with no interest-only period (amortizing from the start over 30 years):

   • Monthly payment $M$ ≈ 1,798.65 over 360 months
   • Total interest = 1,798.65 × 360 − 300,000 = 347,514

   Adding the 5-year interest-only period in the first example raises the total interest by about 22,356, showing the cost of delaying principal repayment.

Notes

The calculator assumes a fixed interest rate, that the balance stays unchanged through the interest-only period, and that the whole balance amortizes over the remaining months with equal payments. Real interest-only loans vary: some have adjustable rates, some allow voluntary principal payments during the interest-only phase, and some end with a large balloon payment instead of amortizing. Because the payment increases when the interest-only period ends, it is worth checking that the higher amortizing payment still fits your budget. To compare with a loan that amortizes from the start, try the auto loan calculator or study the payment breakdown with the amortization schedule calculator.

FAQs

Why does my payment go up after the interest-only period?

During the interest-only period you never reduce the balance, so once that period ends the full amount still has to be repaid, but over fewer months. Squeezing the same principal into a shorter repayment window raises the monthly payment.

Do interest-only loans cost more in total?

Usually yes. Because you postpone paying down principal, you carry the full balance — and pay interest on it — for longer. As the worked examples show, adding an interest-only period increases the total interest compared with a loan that amortizes from the start.

Can I pay down principal during the interest-only period?

Many lenders allow extra principal payments during the interest-only phase. Doing so lowers the balance early, which reduces both the interest you pay and the amortizing payment once the interest-only period ends. This calculator assumes no extra principal payments.