What characterizes an interest accruing loan?

An interest accruing loan is characterized by a structure where no payments are made towards either the principal amount or the interest during the term of the loan. Instead, interest accumulates over time and is added to the principal balance. This means that the borrower does not make any payments until the end of the loan term, at which point the total amount—comprising the original loan amount plus all accrued interest—is due.

This structure allows borrowers to defer payments, but it also means that the total amount payable at the end can be significantly higher than the original loan amount due to the accumulation of interest. As a result, it is important for borrowers to understand this characteristic so they can prepare for the eventual repayment.

Other types of loans might require different payment structures—some might necessitate immediate repayment of the full loan amount, while others may involve making regular interest or principal payments throughout the loan term. A loan with variable interest rates refers to fluctuations in the cost of borrowing based on market conditions but does not inherently define how or when payments are made. Similarly, a loan paid off in one lump sum could refer to loans that have varying payment structures outside of the scope of accruing interest without interim payments.