Loans & debt
Interest-only and balloon loans: Definition, Formula and Example
An interest-only payment covers periodic interest without reducing principal; a balloon payment is a larger lump sum due under the loan’s repayment structure.
Scope: General financial concept; examples are hypothetical.
Other names and related labels: Interest-only payment; Balloon payment; Negative amortization.
How it works
Some loans have an interest-only phase and later amortizing payments, while others require principal at maturity. If a permitted payment does not cover accruing interest and the shortfall is added to the balance, negative amortization occurs. These structures are not the same as a fully amortizing schedule.
Interest-only payment = outstanding principal × periodic interest rate
The principal remains due. Balloon size also depends on any interim principal repayment, fees or capitalized shortfalls.
$100,000 at 6% with monthly interest-only payments
Assume the full principal is due after a year.
- Monthly interest: $100,000 × 0.06/12 = $500.
- Twelve interest payments total $6,000.
- Principal is still $100,000 at maturity.
The borrower pays $500 monthly and still owes the $100,000 principal balloon.
No principal prepayments, fees or rate changes; interest paid separately each month.
The worked example uses the assumptions above. Related tools may model a different scope; check their descriptions before comparing results.
A small payment does not mean the loan is nearly repaid
A balance may stay level or increase. Refinancing the balloon is not guaranteed. Compare the whole schedule and the final obligation, rather than only the initial monthly amount.
Explore with a calculator
- HELOC Calculator
Inspect the modeled interest-only draw phase and later repayment.
- Loan Calculator
Use the applicable loan mode and check any remaining or due principal.
Sources and checks
Definition and example arithmetic checked . Sources explain the concepts; numerical examples use the assumptions stated above.
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