An interest only loan is a loan in which the borrower pays only the interest for some or all of the term, with the principal balance unchanged. Interest only loans can be contrasted with fully amortizing loans, in which each payment consists of both principal and interest, and the principal balance is reduced with each payment. Interest only loans can be beneficial for borrowers who are expecting a future income increase or windfall, such as a bonus or inheritance. By making interest only payments, the borrower can free up cash flow in the short-term, making it easier to manage their finances. However, interest only loans can also be risky. If the borrower’s income does not increase as expected, they may find themselves unable to make the full principal and interest payment when it comes due. This can lead to the loan going into default. For these reasons, it is important for borrowers to carefully consider whether an interest only loan is the right choice for them.