How to Calculate Interest Only Payments
Loan payments are typically a fixed payment that pays off on both the principal and interest. The payment primarily pays off interest at first with later payments going towards the principal. In an interest only payment, the payments go towards interest only and don't pay off any of the principal. The primary advantage of this method is that these payments can be much smaller than regular payments. However, your loan payments must go towards the principal at some point or you'll never pay off the loan.
Other People Are Reading
Instructions
-
-
1
Derive the formula for calculating interest only payments. This is given by the equation P = I x L where P is the payment, I is the interest rate for the payment period and L is the amount of the loan.
-
2
Divide a percentage value by 100 to get the decimal value. Interest is typically given as a percentage but the formula requires a decimal value. For example, if the interest percentage is 12.99 percent, the equivalent decimal value is 12.99/100 or 0.1299.
-
-
3
Convert the interest rate for the compounding period to the interest rate for the payment period. You can accomplish this by dividing the interest for the compounding period by the number of payment periods in the compounding period. The interest rate for a loan is typically compounded annually, while the loan payments are made monthly. For example, assume the annual interest rate is 0.1299 but you'll be making monthly payments. The interest rate for the payment period would be 0.1299/12 = 0.010825.
-
4
Calculate the interest only payment. If the annual interest rate on a $2,500 loan is 12.99 percent, an interest only payment will be P = I x L = 12.99/(100 x 12) 2,500 = 0.010825 x 2,500 = 27.0625. The interest only payment on this loan would therefore be $27.07.
-
1
