Loans & Credit

What Is an Interest-Only Loan?

An interest-only loan is a loan in which, for an initial period, the borrower pays only the interest and none of the principal. Payments are lower during that period, but the balance does not decrease; afterward, payments rise to repay the principal over the remaining term, or a lump sum is due.

Payment Example

On a 200,000 balance at 6% per year, the interest-only payment is 200,000 × 0.06 ÷ 12 = 1,000 a month. Once principal repayment begins, the payment increases.

Trade-Offs

Lower early payments come with no equity built from payments and a larger payment later.

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Last updated: September 29, 2026. This definition is for general educational purposes only. It is not financial, investment, tax, legal, or medical advice, and it does not recommend any product or course of action. For decisions about your own situation, consult a qualified professional.