What is an interest-only loan?

An interest-only loan is characterized by a payment structure where the borrower is only required to pay the interest on the loan for a specified period, rather than making payments toward the principal balance. During this interest-only period, the borrower is not reducing the principal amount of the loan. This type of loan can appeal to borrowers who may want lower initial payments, allowing them to free up cash for other expenses or investments. However, it’s important to note that once the interest-only period ends, borrowers will typically face higher payments that include both principal and interest, often leading to a significant repayment amount.

While the other choices mention different loan structures, they do not define the singular characteristic of an interest-only loan, which is solely the payment of interest until the loan matures or transitions into a repayment phase that includes principal.