Non‑Amortizing Loan
Key takeaways
- A non‑amortizing loan requires repayment of the principal in a single lump sum at maturity rather than through scheduled principal installments.
- Common forms include interest‑only loans, balloon‑payment loans, and deferred‑interest programs.
- These loans typically carry higher interest rates and shorter terms and require an exit strategy (refinance, sale, or takeout loan).
What it is
A non‑amortizing loan does not reduce the principal balance through regular payments. Borrowers may pay only interest (or no payments at all) during the loan term, with the full principal due at the end as a lump‑sum or “balloon” payment.
How it works
- Interest may be paid periodically while the principal remains unchanged.
- At maturity the borrower repays the entire principal in one payment or refinances the loan.
- Lenders must track any occasional installments separately because there is no standard amortization schedule.
Common types
- Interest‑only loan — periodic interest payments only; principal repaid at maturity.
- Balloon‑payment loan — low periodic payments (often interest only or partial amortization) with a large final payment.
- Deferred‑interest program — both interest and principal payments are postponed until the end of the term.
Typical uses
- Real estate development and construction financing, where collateral (a completed building) will exist only after the project is finished.
- Land contracts and short‑term bridge financing that provide time to refinance into longer‑term debt or sell the asset.
- Situations where a borrower expects substantially higher income or liquidity before the loan matures.
Advantages
- Lower periodic payments during the loan term, improving short‑term cash flow.
- Flexibility for projects or borrowers needing time before full repayment or refinancing.
Risks and considerations
- Refinancing risk — borrower must secure a takeout loan or other funds at maturity; if markets tighten, refinancing may be costly or unavailable.
- Higher interest rates — lenders price in added risk and often require higher rates.
- Large payment due at maturity — failure to pay can lead to default or foreclosure.
- Not typically “qualified” loans for resale in the secondary market, which can affect availability and terms.
- Lenders face more complexity in structuring and accounting compared with fully amortizing loans.
Practical advice
- Have a clear exit strategy before taking a non‑amortizing loan (refinance plan, sale timeline, or sufficient savings).
- Compare total cost (interest and fees) against alternatives.
- Verify whether the anticipated future collateral or income is realistic and legally acceptable to the lender.
Summary
Non‑amortizing loans provide short‑term flexibility by postponing principal repayment, but they shift repayment risk to a single maturity event. They can be useful for construction, bridge financing, or situations expecting improved future cash flow, but borrowers should plan carefully for the balloon payment and expect higher borrowing costs.