PIK Interest

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PIK interest, short for payment-in-kind interest, is interest that is not paid in cash but is instead added to the loan balance, increasing the amount owed.

With a normal loan, the borrower pays interest in cash at regular intervals. With PIK interest, the interest accrues and compounds, and the full amount is repaid at maturity.

For example, a company borrows 10,000,000 at 10% PIK interest for three years. After one year, it owes 11,000,000; after two years, 12,100,000; and after three years, about 13,310,000, all repaid at the end.

PIK interest is used when borrowers want to conserve cash, such as companies investing heavily for growth, leveraged buyouts with limited cash flow or companies in financial difficulty. Some loans allow borrowers to choose between paying cash or PIK, sometimes called a PIK toggle.

PIK debt is riskier for lenders, since no cash is received until maturity and the debt grows over time, so it usually carries higher interest rates. For borrowers, the growing debt can become a heavy burden. Increasing use of PIK interest in private credit has been watched as a possible sign of stress among borrowers.

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