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Interest Only Payment Formula:
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An interest-only term promissory note is a financial instrument where the borrower pays only the interest during the term of the loan, with the principal due in full at maturity. This calculator helps determine the periodic interest payments.
The calculator uses the interest-only payment formula:
Where:
Explanation: The formula calculates the periodic interest payment by multiplying the principal by the rate and dividing by the number of periods.
Details: Accurate interest-only payment calculation is crucial for both borrowers and lenders to understand cash flow requirements during the loan term and to properly structure financial agreements.
Tips: Enter principal in USD, rate in decimal form (e.g., 0.05 for 5%), and number of periods. All values must be valid (principal > 0, rate between 0-1, periods ≥1).
Q1: What's the difference between interest-only and amortizing loans?
A: Interest-only loans require only interest payments during the term with principal due at maturity, while amortizing loans pay both principal and interest over time.
Q2: When are interest-only notes typically used?
A: Commonly used in bridge financing, commercial real estate, and situations where the borrower expects a future lump sum to repay principal.
Q3: How do I convert APR to decimal rate?
A: Divide the APR by 100 (e.g., 5% becomes 0.05). For periodic rates, divide by number of periods per year.
Q4: Are there risks with interest-only notes?
A: Yes, the borrower faces lump-sum principal repayment risk, and lenders have higher risk if collateral value declines.
Q5: Can this calculator be used for monthly payments?
A: Yes, if you enter the monthly interest rate and number of months, it will calculate the monthly interest payment.