A feature of the interest rate provisions in a loan whereby the borrower can choose to make interest payments either in cash or by payment-in-kind (PIK) and, during the term of the loan, can alternate back and forth between the two forms of interest payments within certain parameters. This feature allows the borrower to reduce its outgoing cash payments for a period, if necessary, by adding unpaid amounts of interest to the outstanding principal balance of the loan.

PIK toggle loans are riskier for the lender because it assumes the additional credit risk with respect to the PIK interest amount, payment of which is deferred until the loan matures. In a loan that contains a PIK toggle, the loan agreement provides that, if the PIK feature is activated, PIK interest accrues at a rate that is higher than the rate applicable to cash interest payments, typically by about 25 to 75 basis points.