What type of loan is characterized by only interest payments during its term?

The type of loan characterized by only interest payments during its term is an Interest Only Mortgage. In this loan structure, the borrower is required to pay only the interest on the principal balance for a specified period, which typically ranges from a few years to the entire term of the loan. This means that the principal balance does not decrease during the interest-only period, resulting in lower monthly payments compared to traditional loans where both principal and interest are paid.

An Interest Only Mortgage is often attractive for borrowers who anticipate increased earnings in the future or for those looking to invest the difference in monthly payments elsewhere. However, it is crucial to understand that once the interest-only period ends, the borrower will need to start making payments on both the principal and interest, which can lead to significant increases in the monthly payment amount.

In contrast, an amortized loan involves payments applied to both the interest and principal from the commencement of the loan, gradually reducing the outstanding balance until it is fully repaid by the end of the loan term. A balloon loan typically involves smaller payments early on, with a lump sum payment required at the end, which means it does not solely focus on interest payments throughout its term. An equity loan refers to borrowing against the equity in a property and can take