Which type of loan allows for interest-only payments during the term?

A straight loan, also known as an interest-only loan, allows borrowers to pay only the interest for a specified period of time, without paying down the principal. This type of loan structure can be beneficial for borrowers who seek lower initial monthly payments, as they only address the interest charges. At the end of the interest-only period, borrowers must either pay off the entire principal amount or refinance.

Unlike other types of loans, such as amortized loans, where each payment reduces the principal balance over time, or balloon mortgages, which involve both periodic payments and a large final payment, a straight loan primarily focuses on interest payments during its term. This can suit certain financial strategies but may also pose risks if the borrower is unprepared for the eventual principal payment. Home equity loans typically have a different repayment structure as well, often requiring both interest and principal payments from the beginning.