Interest (or preferred dividend) paid by increasing the instrument's principal balance rather than in cash — the lender accrues the coupon and capitalizes it onto the loan. Preserves cash for sponsor distributions, growth investment, or debt service on senior tranches. Common in mezzanine (10-14% all-in, often part-cash/part-PIK), holdco PIK notes (12-16% structurally subordinated), and PIK toggle facilities (borrower's option). PIK accretes the debt balance and the leverage ratio over time, creating refinancing risk at maturity.