Glossary · pricing

Interest-only IO

Also called interest only payments, IO payment, non-amortising payment, interest only period.

A payment structure covering accrued interest and nothing else, leaving the principal balance exactly where it started until amortisation begins or the balance comes due in one payment.

Drafted with AI assistance. Not yet independently checked. Nobody has verified the claims on this page against a source, so treat the figures and legal points as a starting point rather than as settled, and confirm anything you are about to act on. How we check things.

What it means

The payment is small because none of it is repaying anything. On a floating rate the interest-only payment is the balance times the current periodic rate, so it moves when the index moves; on a fixed rate it is a constant figure that does no work.

Where it shows up

  • Construction and project finance. Interest accrues on drawn amounts only during the build, and amortisation starts at completion or conversion.
  • Bridge facilities, which are interest-only by design and end in a single repayment from a sale or a refinance.
  • Equipment on long lead times, where interim interest or interim rent runs on progress payments until the asset is accepted.
  • A ramp-up concession, three, six or twelve months of interest-only at the front of an amortising term loan, given to a business that needs time before the full payment is affordable.
  • Revolving lines, which are structurally interest-only with principal due at maturity or swept from collections.

What happens at the end

One of two things, and the note says which. Either the loan amortises the unchanged principal over the remaining term — a shorter period than the original, so the payment is higher than it would have been without the concession — or the whole balance falls due as a balloon and you must refinance or sell by a fixed date.

Where this one catches people

"Interest-only for the first year" reads as relief and is priced as a cost. Nothing is repaid, the balance on the day amortisation starts is identical to the balance on day one, and because the remaining term is shorter the amortising payment is bigger than the payment on a straight loan of the same size. You pay more in total, not less.

Two specific dangers. On a variable-rate facility the quoted interest-only payment is today's index and will move. And where the interest-only period ends in a balloon rather than an amortisation, the entire principal is due on a stated date — which means you are relying on a refinance market that may not be there, on terms nobody has promised you.

Worked through

Illustrative. 300,000 at 11 percent on a five-year note, with the first 12 months interest-only.

Interest-only payment: 300,000 × 0.11 ÷ 12 = 2,750 a month. After twelve of those, you have paid 33,000 and the balance is still 300,000.

Amortising 300,000 at 11 percent over the remaining 48 months gives a payment of about 7,753. Total over that stretch: about 372,100. Add the 33,000 and the whole deal costs about 405,100.

Compare the same loan amortised over 60 months from the start: about 6,523 a month, about 391,400 in total.

The interest-only year cost about 13,700 extra and raised the eventual payment from 6,523 to 7,753 — a payment 19 percent larger, arriving in month 13, at a business that took the concession because it could not afford 6,523 in month one.

Figures in the example are illustrative. They show the arithmetic, not a quote — what any one lender would charge is on that lender's page, where it is published at all.

Where you will meet this term

Term Loan Business Line of Credit SBA Loan Equipment Financing Asset-Based Lending

Read next

AmortizationRepaying a loan through scheduled payments that cover interest on the outstanding balance and reduce principa… Balloon paymentA large final payment due at maturity because the scheduled payments were calculated on a longer amortization… Bridge loanShort-term financing taken to cover the gap until a defined event, usually a sale, a refinance or a permanent… Draw periodThe window during which a facility can be drawn on, after which no new draws are permitted and the outstandin… Fully amortizingA payment schedule that retires the entire balance plus all interest by the final scheduled payment, leaving … MaturityThe date the final scheduled payment falls due and any remaining balance must be repaid in full. PrincipalThe amount borrowed and still owed before interest and charges - a concept that exists in loans and does not … Progress paymentPayment released against work completed to date rather than on delivery of a finished job — standard in const… Simple interestInterest charged on the outstanding principal for the time it is actually outstanding, so paying down princip… Variable rateA rate stated as an index plus a margin, so the payment changes when the index moves — which makes the monthl…

Interest-only — common questions

What does interest-only mean?

A payment structure covering accrued interest and nothing else, leaving the principal balance exactly where it started until amortisation begins or the balance comes due in one payment.

Where does interest-only catch people out?

"Interest-only for the first year" reads as relief and is priced as a cost. Nothing is repaid, the balance on the day amortisation starts is identical to the balance on day one, and because the remaining term is shorter the amortising payment is bigger than the payment on a straight loan of the same size. You pay more in total, not less.

Is interest-only the same as an interest rate?

Interest-only is defined above; if you are comparing it against a rate, check whether the two measures share a time dimension before you put them side by side.

Which products does interest-only apply to?

Term Loan, Business Line of Credit, SBA Loan, Equipment Financing, Asset-Based Lending.

Is there a worked example of interest-only?

Yes, on this page, and it is labelled illustrative. It shows the arithmetic, not a quote from any lender.

What else should I read alongside interest-only?

Amortization, Balloon payment, Bridge loan, Draw period, Fully amortizing.

Has this definition been checked?

Not yet. This entry is drafted and live, and the notice at the top says so. Confirm anything you are about to act on.

Is this legal advice?

No. It is a definition. What a clause does in your contract, in your state, is a question for a lawyer licensed where you are.

Can I suggest a term?

Yes — [email protected]. The glossary grows from what people are actually shown in contracts.