What is the formula for calculating interest-only payments?

What is the formula for calculating interest-only payments?

• A. Interest rate X loan amount ÷ 12
• B. Interest rate ÷ loan amount × 12
• C. Loan amount × interest rate
• D. Interest amount per year

Answer: (A)

The key idea is converting yearly interest into a monthly payment for an interest-only loan. The monthly payment equals the annual interest, which is the loan amount times the annual interest rate, divided by 12 to spread it across the 12 months. So the correct formula is: (loan amount × annual interest rate) ÷ 12. The other options don’t fit because they either produce the annual interest (loan amount × rate) or mix factors in a way that doesn’t reflect monthly payments (rate ÷ loan amount × 12), or simply state the annual amount (interest per year) rather than the monthly amount.

The key idea is converting yearly interest into a monthly payment for an interest-only loan. The monthly payment equals the annual interest, which is the loan amount times the annual interest rate, divided by 12 to spread it across the 12 months.

So the correct formula is: (loan amount × annual interest rate) ÷ 12.

The other options don’t fit because they either produce the annual interest (loan amount × rate) or mix factors in a way that doesn’t reflect monthly payments (rate ÷ loan amount × 12), or simply state the annual amount (interest per year) rather than the monthly amount.