An interest-only loan, also known as a bullet loan, is a loan in which the principal debt is not repaid during the term. Instead, the borrower only pays interest on the amount borrowed during the term of the loan. The principal is only repaid in one go at the end of the term. This means that the borrower has lower monthly payments during the term of the loan, because only interest is paid and there are no periodic repayments on the principal.
When the loan expires, the entire loan (principal debt) is repaid in one go, often with the proceeds from the sale of the property or by means of refinancing.
In practice, an interest-only loan or bullet loan is often used for real estate financing, for example in the financing of real estate projects where the proceeds are only available to repay the loan after completion of the renovation or sale.