On an interest-only loan, you pay just the interest — the balance never drops. The monthly payment is simply the balance times the periodic rate, no PMT needed.
The example
$200,000 at 6% interest-only.
| A | B | |
|---|---|---|
| 1 | Item | Value |
| 2 | Balance | $200,000 |
| 3 | Monthly interest | $1,000 |
The formula
The formula:
How it works
How it works:
- Interest-only means the principal doesn’t amortize — you only cover the interest.
- The payment is
balance × (annualRate / 12)— no PMT function required. - It’s lower than an amortizing payment, but you owe the full balance at the end.
- Compare to the amortizing payment (
PMT) to see how much principal you’re not paying down.
The balance never shrinks. Interest-only keeps payments low but builds no equity — and when the interest-only period ends, the payment jumps as principal kicks in. Always compare total cost against a standard amortizing loan.
Try it: interactive demo
Balance and annual rate.
Variations
Annual interest
Per year:
Amortizing (compare)
With principal:
IPMT (first payment)
Interest portion:
Pitfalls & errors
No equity built. The principal is unchanged — you still owe the full balance.
Payment shock later. When interest-only ends, the amortizing payment is much higher.
Match the period. Divide the annual rate by 12 for monthly interest.
Practice workbook
Frequently asked questions
How do I calculate an interest-only payment in Excel?
How is interest-only different from a normal loan payment?
What happens when the interest-only period ends?
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