Which form of loan allows borrowers to make only interest payments for a period of time?

An interest-only loan is specifically designed to allow borrowers to make payments consisting solely of interest for a predetermined period, usually the initial phase of the loan term. During this time, the principal balance remains unchanged, which can be advantageous for borrowers who may want lower monthly payments while they manage other expenses or investments. After the interest-only period ends, the loan may either convert to a fully amortizing payment schedule, where both principal and interest are paid, or require a lump-sum payment of the principal at the end of the term.

In contrast, a fully amortized loan features consistent monthly payments that cover both principal and interest throughout the life of the loan, gradually decreasing the outstanding balance over time. A partially amortized loan also requires some principal payments during the loan term, leading to a remaining balance that must be paid off at the end. Finally, conventional loans generally refer to standard mortgage loans not insured or guaranteed by a government agency, but they can be either fully amortizing or other types, including interest-only. Thus, the unique characteristic of allowing only interest payments for a set time frame clearly defines the interest-only loan.