A form of loan in which the borrower only pays interest over the loan’s life, while repayment of the principal is deferred until maturity date or some future date. Payments cover only the interest on the borrowed amount, and thus the balance on the loan remains unchanged. Over the loan’s life, the borrower makes periodic payments of accrued interest. At maturity date, the entire principal amount becomes due and payable in a single lump-sum amount. Typically, interest-only loans are negotiated for maturities from two to ten years, with interest payment during the term, and no provision for early payment or loan renewal. For example, if a borrower takes out an interest-only loan for $50,000, in 2 years, he will still owe the same amount at the time of every payment. At the end of the loan, the borrower will have to make a balloon payment equal to the initial and ending loan balance.

This loan is also known as a straight term loan or a bullet loan.