finance
interest-only loan
A loan in which the borrower pays only the interest for a specified period, so the principal balance does not decrease during that time. After the interest-only period, payments rise to include principal, or the full principal may be due as a balloon payment. These loans offer lower initial payments but carry the risk of payment shock.
- Exam tip
- An interest-only loan is also called a straight or term loan when the entire principal is due at the end. The balance stays the same during the interest-only period.
- Example
- On a $200,000 loan at 6%, an interest-only payment is $12,000 per year, or $1,000 a month, and the balance stays at $200,000.
Related terms & state variants
Sources
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Last verified: 2026-10-23