Interest Only Payment
What interest-only costs each month, and what is still owed at the end.
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Formula
How the calculation works
An interest-only loan charges the interest each month and never touches the principal. On 200,000 at 7% the payment is 1,166.67 and stays there for the whole term, and at the end the full 200,000 is still owed. Over ten years that is 140,000 of interest for no reduction in the debt at all.
The low payment is the trap. A repayment loan on the same terms would cost considerably more each month but would clear the debt. The difference is not that interest-only is cheaper, but that it defers the entire principal to a single day at the end. The total interest is also higher than a repayment loan, because the balance never falls.
This structure suits a borrower with a definite plan for the lump sum at the end, and it is dangerous without one. The tool reports the balance at the end explicitly, because that number is the whole point and it is easy to lose sight of when the monthly figure looks comfortable.
Common mistakes
- Treating the low monthly payment as the cost of the loan, when the principal is still owed in full at the end.
- Assuming the payment will fall over time as it does on a repayment loan. It never changes.
- Ignoring the total interest, which is higher than a repayment loan at the same rate because the balance never falls.
When to use it
- Use it to see exactly what an interest-only period costs and what has to be repaid at the end, before agreeing to one.
- It is not suitable for comparing against a repayment loan on the monthly figure alone. The two need comparing on total cost and on what you can repay at the end.
Worked example
200,000 at 7% interest-only over ten years pays 1,166.67 a month, 140,000 of interest, and still owes 200,000.
Common questions
Why is the payment so low?
Because none of the principal is repaid, only the interest. The whole loan is still due at the end.
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