What's an interest only business loan?

Here, we look at what you should know before deciding if an interest only business loan is right for you.

Interest only loans explained

Generally, business loan repayments have two parts:

• Principal – your loan balance, or the initial amount that you borrow
• Interest – a percentage of your balance charged by your lender, payable on top of the balance

When you pay both the principal and interest, you reduce your loan balance during the loan term. Because interest is calculated on the outstanding balance of your business loan, this means the amount of interest you pay will also reduce. However, with an interest only loan, your actual loan balance during the term of the loan won’t reduce as your repayments will only cover the interest on the amount borrowed. As you’re not reducing your loan balance, you’ll end up paying more interest over the life of your loan.

Interest only periods

You can switch between interest only and principal and interest repayment options during the life of your loan. However, there are limits on the interest only periods for all of our business loans. These limits apply when you request a new or extended interest only period.¹

When the interest only period expires, repayments will change to principal and interest. The repayment amount will increase as you start paying off your loan balance. In which case, it's important to be prepared for this change and plan accordingly. 

How interest only repayments work

Because the repayments only cover the interest amount for a set period, they'll be lower than if you were repaying both the principal and interest – however, it's important to remember your actual loan balance won’t reduce.

At the end of this period, you’ll need to repay the loan principal over the rest of the term of the loan. This means the principal and interest payments will be higher than they would have been before the interest only period.

Here’s an example²:

• Matteo takes out a BetterBusiness Loan of $100,000 for five years at an interest rate of 5%
• If he were to make principal and interest repayments, his monthly repayments would be $1,888. Over the life of the loan, he would pay $13,228 in interest
• However, Matteo sets a 1 year interest only period, so his first 12 monthly payments are $417 each. This repayment amount is based on a discount or interest rate that applies for an initial period only. Repayments will change when the discount ceases or the interest rate reverts to the applicable variable rate
• For the remaining 4 years of the loan, he needs to repay the principal and interest at 5%, so his monthly repayments increase to $2,303
• Over the life of the loan he’ll pay a total of $15,541 in interest – which is $2,313 more than a principal and interest loan

Your options after the interest only period¹

Transition to a principal and interest loan

When an interest only loan period expires, the loan will automatically transition to principal and interest. If you’re happy with this, there's no need to take any action.

Extend the interest only period

If the interest only loan period is coming to an end and you decide you'd like to extend it, you can discuss the options with our Business Banking team or your Relationship Manager. At this time, we may need to assess your financial circumstances to approve you for a new interest only period. 

Get a new interest only business loan

After the interest only loan period expires, you might decide to instate a new interest only period. In which case, you will need to apply again. Our Business Banking team or your Relationship Manager can help with this.

Learn more about Business Loans & Finance