Loan with an interest-only period
An interest-only period lets you pay just interest at the start, which helps when launching a business or an investment. But afterwards the payment is higher and the loan costs more. Work out how much.
How a loan with an interest-only period works
Enter the loan amount, interest rate, total term and interest-only months. The calculator shows the payment during the interest-only period, the payment afterwards, the payment you would have without it, total interest and how much extra the interest-only period costs.
Example: a 100,000 loan at 5% over 10 years with 12 interest-only months lets you pay 416.67 a month in the first year. Afterwards, the payment rises to 1,151.73, 91.07 more than without the interest-only period (1,060.66). In total you pay 29,387 in interest, 2,108 more than without it.
How it is calculated
- During the interest-only period you pay just interest: loan × annual rate ÷ 12 each month.
- Afterwards, a fixed payment (standard amortization) on the full amount over the months left in the term.
- Extra cost = total interest with the interest-only period − interest on the same loan without it.
Assumptions
- Interest is paid during the period; it is not added to the balance.
- The interest-only period is part of the total term.
- Fixed interest rate and no fees.
Frequently asked questions
What is an interest-only period?
A period at the start when you repay no principal. You pay only interest and the debt does not fall until the period ends.
Why does the payment rise afterwards?
Because you have to repay the whole amount in fewer months: the interest-only months have already passed. In the example, the 100,000 is repaid over 9 years instead of 10.
How much more does an interest-only period cost?
More interest, because the debt takes longer to start falling. In the example, 2,108 more. The longer the period and the higher the rate, the bigger the difference.
When does an interest-only period make sense?
When what you finance takes time to generate income: launching a business, refurbishing a property before letting it or an investment that starts producing later. If you do not need it, repaying from the start is cheaper.
What about a full payment holiday?
With a full payment holiday you pay nothing and the interest is added to the debt, so the loan costs even more. This calculator only covers interest-only periods, in which you do pay the interest.