Generating Interest Only Loan Payment Schedules with AMCalc

One type of loan payment schedule that AMCalc calculates are those for interest only loans.  As the name suggests, these loans are calculated with payments that only cover the interest on the loan principal for one or more payment periods.  In other words, no loan principal is paid off during these interest only periods.

There are a number of factors that may make an interest only loan advantageous for some borrowers.  One reason may be that the borrower prefers lower initial loan payments because they expect cash inflows that they will put towards the principal of the loan at a later date. 

In this post I will not be getting into all of the reasons why an interest only loan may make sense in certain situations.  Instead, I will be focusing on the different options available to you when using AMCalc for interest only loans and how those options impact the generated payment schedule.

Interest Only Periods and Loan Amortization

One of the first things you may notice when you are using AMCalc to generate interest only loans is that you have the option of including the interest only periods within the amortization of the loan or outside of it.  You can switch between the two options by checking and unchecking the “Include Interest Only Periods within Loan Amortization” check box at the bottom of the calculator once you select “Interest Only” from the Loan Type drop down list.

Including or excluding interest only periods from the loan amortization have dramatic impacts on the resulting payment schedule, so let’s dive into the difference.

Including Interest Only Periods Within the Loan Amortization

When you include interest only periods within the loan amortization (this is the default behavior), the payment schedule will have the number of payment periods that have been calculated given the loan term and payment frequency. However, because some (or all) of the payment periods only include the interest amount due, the last payment in the schedule will be a balloon payment.

Let’s see an example. 

For this payment schedule we have a loan for $25,000 to be paid off in 10 years. 

Loan payments will be made monthly and, for the first year of the loan (12 payment periods), only interest will be paid. 

Also note that we have kept the Include Interest Only Periods within Loan Amortization check box checked.

Now let’s see what the generated payment schedule looks like.

As expected, the schedule contains 120 payment periods, the first 12 of which only pay an interest amount of $185.42. Starting in period 13, the total payment amount increases because the interest only periods are complete and the borrower will now have both a principal reduction and interest component within the total payment.

At the end of the loan in period 120, the total payment jumps up to $3,922.80. This is because there were no payments to principal for the entire first year of the loan, but the loan was still scheduled to be paid off in 10 years.

Interest Payment Periods Outside of Loan Amortization

Now let’s take a look at the same loan, but this time the interest only periods will not be included within the amortization of the loan. 

Notice that the only difference between this calculator and the last is that the Include Interest Only Periods with Loan Amortization check box is not checked. 

Below is the generated payment schedule.

There are a number of things about this payment schedule that are the same as the previous one.  There are 12 periods of interest only payments of $185.42 and, starting with the 13th period, payments of principal and interest together equal $315.34, just like before.

But you may have already noticed a couple key differences. 

First, there are 132 payment periods instead of 120 periods like before.  In fact, the calculator told us this before the schedule was generated.  Take a look at the calculated number of payment periods shown on the calculator under the Last Payment Date field.  Once we unchecked the Include Interest Only Periods with Loan Amortization check box, AMCalc adjusted the number of payment periods to include the additional interest only payment periods that would be added to the schedule.

The reason for the additional periods is because when the interest only periods are not included within the loan’s amortization, they are added to the term of the loan. So, 120 payment periods for the loan term, plus 12 interest only periods, give us 132 total payment periods.

Another difference between this schedule and the first is that, because we have all 120 periods to make principal and interest payments, there is no balloon payment at the end of the loan.

One other difference between this loan and the first one that is not obvious is that when interest only periods are added to the loan term, AMCalc uses the period start date of the first period in the schedule of principal and interest payments to start calculating the amortization of the loan. This is instead of the loan start date that was input into the calculator.  The reason this is not obvious in this particular loan is because we used a month convention of 30 days and a year convention of 360 days to calculate interest.  If instead we used Actual for the month or year convention, there may be a slight difference in the calculated fixed payment amount between the first loan and the second loan.

Interest Only for the Entire Loan Term

Both of our examples showed loans where interest only periods were for a portion of the loan.  However, AMCalc allows you to input anywhere from one interest only period to an entire loan with interest only payments.  So AMCalc also makes it easy to generate schedules for full interest only loans. In the case of a loan that consists entirely of interest only payments, the full loan principal will be due at the end of the last period of the loan.

If you want to see all of the types of payment schedules that AMCalc generates, go to the Salesforce AppExchange and download the app to your Salesforce system.  You can try it free for 7 days.

Leave any questions or comments you might have about this post in the comments section below and I will do my best to respond. Thank you for reading!