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What's an interest only business loan?

An interest only business loan means you only pay the interest charges, not the principal amount on your business loan.

Before deciding if an interest only business loan is right for you, here are a few things to consider:

  • The difference between interest only loans and principal and interest loans
  • Interest only periods
  • How interest only repayments work
  • Your options after the interest only period ends

Interest only loans explained

Generally, business loan repayments have two parts:

  1. Principal – your loan balance, or the initial amount that you borrow
  2. 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.

With an interest only loan, you only pay the interest charges, not the principal amount on your business loan. This means your loan balance won’t reduce during the term of the loan 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 example:2

  • 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 ends 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

  1. 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.
  2. 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. 
  3. 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'll need to apply again. Our Business Banking team or your Relationship Manager can help with this.

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Things you should know

This information is current as at 29 September 2022 and has been prepared without taking into account your individual and/or business need and objectives. Before acting on this information, you should consider its appropriateness to your circumstances.

1 Interest only repayment periods are subject to subject to the Bank's eligibility and suitability criteria and normal credit approval processes. Full Terms and Conditions, repayment type and term are detailed in the Loan Offer.

2 All amounts, rates and calculations shown above are examples only and are not necessarily complete or accurate.

Credit provided by the Commonwealth Bank of Australia. These products are only available to approved business customers and for business purposes only. Applications for finance are subject to the Bank's eligibility and suitability criteria and normal credit approval processes. You can view the current Terms and Conditions for Business Finance and consider them before making any decision about these products. Fees, charges and Terms & Conditions apply. Rates subject to change. For current interest rates, visit Business banking rates and fees.