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.

  1. Monthly interest: $100,000 × 0.06/12 = $500.
  2. Twelve interest payments total $6,000.
  3. 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

Calculation methodology and review status · All glossary terms