Wize University Introduction to Finance Textbook > Time Value of Money
Interest-only Loan
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Interest-Only Loan
An interest-only loan is a loan that requires the borrower to periodically pay the accumulated interest. The principal is due at maturity.
This loan is a simple interest loan, interest does not accumulate since it is paid periodically.
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Example: Interest-Only Loan
You agree to borrow $40,000 today using an interest-only loan with an effective annual rate of 6% for 6 years. How much will you pay at the end of each year? How much will you pay at the end of the 6th year?
Practice: Interest-Only Loan
You want to borrow $70,000 for a new car. The dealership is offering a special APR of 0.99% compounded semi-annually for 3 years.
The loan is an interest-only loan, what will the annual payments be and what will you pay at the end of the 3rd year?
Round the effective rate to at least 6 decimal places and your final answer to the nearest dollar.