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Interest-Only Loan Calculator

See the monthly interest-only payment, what is due when that period ends, and how the total interest compares with a regular amortized loan.

How an interest-only loan is calculated

During the interest-only period, each payment is one month of interest on the full amount: the amount × the yearly rate ÷ 12. The balance does not go down. When the period ends, either the full amount falls due in one sum, or the principal is repaid with a fixed monthly payment over the repayment period you enter, the same way a regular amortized loan works. The comparison below the results spreads the same loan over the same total term as a regular amortized loan from the first month.

A worked example

A $100,000 loan at 5%, interest-only for 5 years, costs $416.67 a month, and the $100,000 is due at the end. That comes to $25,000.20 in interest. Amortized over the same 5 years, the payment is $1,887.13 a month and the total interest $13,227.39. With 2 years interest-only followed by 8 years of repayment, the payment is $416.67 for 2 years and then $1,266.00 a month, for $31,535.17 in interest over 10 years, compared with $27,278.46 when the loan is amortized over all 10 years.

Why the total interest is higher

At the same rate and over the same total term, an interest-only loan costs more interest, because the balance stays at the full amount for longer. What it changes is timing: lower payments at the start, and a larger payment or a lump sum later. In a family loan, the borrower and the lender set that structure between themselves; a written agreement can record the interest-only period, the rate and what happens when it ends.

Frequently asked questions

What is an interest-only loan?

A loan in which the borrower pays only the interest for a set period, so the balance stays the same. When the period ends, the principal is repaid, either in one sum or in monthly payments over a set term.

Does an interest-only loan cost more than an amortized loan?

At the same rate and over the same total term, yes. The balance stays at the full amount during the interest-only period, so more interest is charged on it. The calculator shows the difference next to an amortized loan over the same term.

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

That depends on what the borrower and the lender agree. The calculator assumes only interest is paid in that period. Any extra payment lowers the balance, and with it the interest in the months that follow.

What interest rate do family loans use?

Whatever rate the two of you agree on. In the US, the IRS publishes Applicable Federal Rates every month. If a loan between individuals charges less than the applicable rate, the IRS can treat the interest that was not charged as a gift to the borrower and as interest income to the lender under its below-market loan rules, with exceptions for smaller loans. Our AFR calculator shows the current rates; a tax advisor can tell you how the rules apply to your loan.

Track the loan you agree on

Family Loan Tracker schedules a loan with a fixed monthly payment until the balance reaches zero, like the amortized comparison above. Both of you see every payment and the remaining balance.