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A normal loan has to be paid back with interest. Every now and then there are interest-free loans where only the loan has to be paid back but no interest, e.g. among relatives or friends, but also as a form of state subsidy.

I am looking for the name and examples of interest-only loans from practice where only an interest has to be paid for some period of time, but the loan itself doesn't have to be paid back. I can imagine situations where such loans (or gifts) may make sense (again among relatives or friends or as a form of state subsidy). The idea might be: The borrower must continuously prove that he is serious and worth the gift.

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    $\begingroup$ I guess there is a difference between "interest paid forever" and "interest for X time" – the second one can be reworded to a normal (possibly partial) "pay back in rates" plan. (There might be also a version like "interest forever, but one side has an option to cancel it (which then forces a payback)". $\endgroup$ Mar 29 at 21:22

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Classic example are the British consol bonds. British consol bonds are perpetuities so that means the principal never has to be paid back (although government could repurchase them on an open market).

Consols only pay coupon payments (interest equivalent for bonds) and since they are perpetual the principal never has to be paid back.

General term for such loans where principal does not need to be repaid is perpetual loans (although most people will just use term perpetuity which is umbrella term that can be used for any asset, not just loan, which entitles owner to perpetual interest rate payments).

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  • $\begingroup$ Is there a common name for this type of loan? Is "interest-only loan" ok. (I mean, consol bonds are only an example - of what?) $\endgroup$ Mar 29 at 12:21
  • $\begingroup$ What about "interest-bearing gift"? $\endgroup$ Mar 29 at 12:24
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    $\begingroup$ @Hans-PeterStricker If you read the first sentence of 1muflon1's reference, you'll find "...consols [...] were government debt issues in the form of perpetual bonds", and following the link for perpetual bond you'll find "A perpetual bond [...] is a bond with no maturity date". $\endgroup$
    – Giskard
    Mar 29 at 12:36
  • $\begingroup$ @Giskard: The rationale of perpetual bonds is explained in the WP article: "Most perpetual bonds issued in the present day are deeply subordinated bonds issued by banks. The bonds [...] help the banks fulfill their capital requirements." Can you explain in a few words what this means? How do perpetual bonds help the banks fulfill their capital requirements? Which requirements exactly? $\endgroup$ Mar 29 at 12:43
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    $\begingroup$ @Hans-PeterStricker if gift bears interest then by definition it ceases to be a gift. The name for such loans are perpetuities (perpetual loans - although not every perpetuity needs to be a loan but perpetuity is umbrella term that includes all such loans where only interest is being paid). Or you could just use term perpetual loan (although people will typically just say perpetuity even though its technically an wider umbrella term) $\endgroup$
    – 1muflon1
    Mar 29 at 12:46
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In his comment to the original question user Paŭlo Ebermann gave me the right hint: I posed my question unclearly and did not mention that I were interested mainly in non-repayable loans with interest but finite term.

And Paŭlo is perfectly right that this is just partial pay back in rates.

We then may compare (in order of "generosity")

  • full pay back at once with interest

  • full pay back in rates with interest

  • no pay back with interest (no maturity date = perpetual bond)

  • partial pay back at once

  • partial pay back in rates

  • no pay back without interest (= gift)

In the partial cases you don't need interest but can subsume it in the part to be paid back.

So the answer to my question is: This kind of interest-only loans is essentially to be called "partial pay back in rates".

On the market partial pay back doesn't play a role because its definitely a (partial) gift (the rest that doesn't have to be paid back) and gifts are not made on the market, right?

But partial pay back in rates may be a tool of state subsidy.

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