In an interest-only loan, what is the monthly payment obligation of the borrower?

In an interest-only loan, the monthly payment obligation of the borrower consists solely of interest payments. This type of loan structure allows the borrower to pay only the interest accrued on the loan during an initial period, rather than paying down the principal balance. This can result in lower monthly payments compared to traditional loans that require both principal and interest payments.

Borrowers typically choose interest-only loans for various reasons, such as lower payments initially, allowing them to invest the difference elsewhere or manage cash flow more effectively. However, it's essential to understand that while this structure lowers short-term payments, it does not reduce the principal owed, which must be addressed later, usually by a lump-sum payment or higher payments once the interest-only period ends.

In contrast, the other options involve different payment structures that are not applicable to interest-only loans. Full principal and interest payments would be characteristic of traditional amortizing loans. Not requiring any payments at all is erroneous since some payment is always expected in an interest-only setup, and only fees accrued from the loan would imply an absence of any interest obligation, which does not reflect the true nature of interest-only loans.