Which loan type involves making only interest payments during its term?

An interest-only loan exclusively requires the borrower to make payments covering only the interest for a specified period of time. This means that throughout the term, the principal balance remains unchanged, and at the end of the term, the borrower will need to pay back the full principal amount in one lump sum. This loan structure is often appealing for borrowers looking for lower initial payments, such as those purchasing investment properties or wanting to manage cash flow.

In contrast, an interest accruing loan would typically accumulate interest that may become part of a principal balance, a straight-line principal reduction loan involves both interest and principal payments, gradually reducing the principal over time, while a blanket mortgage secures multiple properties under a single loan, not specifically relating to payment structures focusing solely on interest. This understanding reinforces why the interest-only loan is defined by its unique payment arrangement.