Below, you can find out how to use our interest-only loan calculator to plan your loan amortization schedule effectively.
What Is An Interest-Only Loan?
Taking out loans and keeping track of your expenditure until you pay them off can be tedious. Fortunately, a less demanding option is available in the form of an interest-only loan. An interest-only loan is a type of loan; after receiving the money, you only have to pay back the interest every month. However, this arrangement lasts only as long as three to ten years. After this period, you will have to pay back heftier sums that include parts of the principal amount. Finally, after an extended period, the loan will be fully amortized. This loan is not suitable for everyone – it is a common practice to use it for upgradable investments such as houses. Do your research or hire a consultant to find out which kind of loan suits your needs.
You might consider yourself a maths whizz, but financial calculations can be cumbersome even for the best. Our loan calculators promise to ease the hassle of handling your money. There’s a lot more to finance than loans, however. Check out our complete range of financial and business calculators.
How Does The Interest-Only Loan Calculator Work?
There are many factors to consider when planning your financial future if you are more of a do-it-yourself person. As a result, things can quickly get confusing. That’s where our interest-only loan calculator comes into the picture. Our calculator helps you calculate the interest required to be paid. All you have to do is type out the principal amount, the interest rate, and the frequency of payment. Once you hit Calculate, the calculator tells you exactly how much you have to pay each period. Based on this, you can easily map out an amortization schedule. We explain the calculator’s utility in a little more detail below.
Loan Amount
In the first field, you have to key in the initial loan amount or the principal. In an interest-only loan setup, this amount is never amortized in the initial interest-only period. After the initial tenure, the borrower can either pay off the complete principal in a lump or enter a second tenure during which conventional loan rules apply.
Interest Rate
In the next field, you have to mention the rate of interest applicable to your loan. Due to the nature of interest-only loans, they often pose a higher risk for lenders than conventional loans. Due to this reason, interest rates for this kind of loan are marginally higher than the norm. Financial planning is of great importance.
Payment Frequency
In the last field, you have to type in the frequency of payment. It is generally a monthly payment, but our calculator has several options, ranging from weekly to annually. Defaulting on a payment can irreparably damage your credit score, so paying attention to every detail is essential.
An Example
Let’s take a look at a hypothetical example of how our interest-only loan calculator can be used.
Let’s say Brad has just moved to a new city and is looking for a starter home. He can’t afford one at the moment, so he decides to take out an interest-only home loan. Brad borrows an initial amount of $50,000 at an annual interest rate of 3.5%. According to the loan agreement, he has to make monthly payments for seven years before beginning the amortization of the loan.
Now, Brad is smart. He didn’t just sign the first piece of paper he saw, but did his homework – he had to make sure that the monthly payment was within his means. And all he had to do was key the numbers into our calculator. Typing in the above values and clicking Calculate tells him that the monthly interest due is $145.83. He knows this amount is within his capability, and he can comfortably take out the loan. The total interest paid over the whole tenure can be calculated by multiplying the periodic interest by the number of periods. In this case, 7×12=84 months; the total interest payable is 84×145.83=$12,249.72.
After the initial tenure, you can either pay the principal upfront or over a second period. If the principal amount is paid through a simple loan setup, try out our simple loan calculator.
Conclusion
As it is, there are a lot of things to keep an eye on when taking out a significant loan. Our interest-only loan calculator lessens the burden by taking care of the fine calculations for you. As a result, you can easily make plans to improve your credit score. Moreover, successfully paying off smaller interest-only loans qualifies you for bigger ones, so that’s a bonus. If interest-only loans aren’t a part of your plan of action, be sure to check out our fixed-rate mortgage calculator and balloon loan calculator.