What is an interest-only loan?

An interest-only loan allows you to pay just the interest charge each month for a set period (typically 5–10 years), without reducing the principal balance. After the interest-only period ends, payments increase significantly as you must repay the full principal over the remaining term. These loans offer lower initial payments, which can help buyers qualify for larger loan amounts or manage cash flow during a business ramp-up. However, you build no equity during the interest-only period, and the payment shock when amortization begins can be substantial. Interest-only loans are more common in commercial lending and jumbo residential markets.