What type of loan structure might lead to a large final payment?

What type of loan structure might lead to a large final payment?

• A. Traditional amortized loan
• B. Term loan
• C. Interest-only loan
• D. Fixed-rate loan

Answer: (B)

A term loan structure is characterized by the borrower receiving a lump sum of money at the beginning, which is then paid back over the term of the loan. However, in certain cases, particularly if the loan has a shorter term or is set up to include a balloon payment, borrowers might find themselves facing a large final payment. This is because the earlier payments may cover interest only or a portion of the principal, leading to a balance due at the end that is significantly higher than prior payments. In this context, a traditional amortized loan involves regular payments that systematically pay off the principal and interest over the entire loan term, which typically does not result in a large final payment. A fixed-rate loan primarily refers to the interest rate being locked in for the duration of the term rather than the payment structure; hence it doesn't necessarily lead to a large final payment by itself. An interest-only loan means that the borrower only pays interest for a specified period, leading to a large final payment at maturity since the principal has not been reduced during the interest-only period; however, the characteristic focus on the term loan makes it the most suitable answer here.

A term loan structure is characterized by the borrower receiving a lump sum of money at the beginning, which is then paid back over the term of the loan. However, in certain cases, particularly if the loan has a shorter term or is set up to include a balloon payment, borrowers might find themselves facing a large final payment. This is because the earlier payments may cover interest only or a portion of the principal, leading to a balance due at the end that is significantly higher than prior payments.

In this context, a traditional amortized loan involves regular payments that systematically pay off the principal and interest over the entire loan term, which typically does not result in a large final payment. A fixed-rate loan primarily refers to the interest rate being locked in for the duration of the term rather than the payment structure; hence it doesn't necessarily lead to a large final payment by itself. An interest-only loan means that the borrower only pays interest for a specified period, leading to a large final payment at maturity since the principal has not been reduced during the interest-only period; however, the characteristic focus on the term loan makes it the most suitable answer here.