Payment-in-Kind (PIK) provisions allow borrowers to capitalize unpaid interest, offering flexibility but potentially enabling excessive forbearance. Testing predictions of a simple model with comprehensive Business Development Company (BDC) loan data, we show that PIK is primarily used for forbearance. PIK delays the recognition of early losses while predicting persistent deterioration later rather than recoveries. Adverse outcomes are driven by PIK exercised after (not at) origination. Consistently, lenders of PIK’ed loans extend their maturities rather than recapitalize the borrowers. Funding markets discipline excessive PIK-lending by BDCs: an increase in PIK-exposure reduces bank funding, and public equity investors discount PIK-exposure exercised post-origination.