What is the classification of a loan that requires interest payments only until maturity?

What is the classification of a loan that requires interest payments only until maturity?

• A. Amortized loan
• B. Balloon loan
• C. Term loan
• D. Adjustable-rate mortgage

Answer: (C)

A loan that requires interest payments only until maturity is classified as a term loan. This type of loan structure typically means that the borrower pays only the interest accrued on the principal balance throughout the duration of the loan. At the end of the term, the entire principal amount is due, which can be a significant balloon payment unless the loan has a refinancing provision. In the context of real estate financing, term loans can be advantageous for borrowers who want to maintain lower monthly payments and perhaps plan to sell or refinance the property before the principal is due. This characteristic distinguishes term loans from amortized loans, where both principal and interest are paid down over the life of the loan, and from balloon loans, which also involve a large final payment but typically follow an amortization schedule until that point. Adjustable-rate mortgages are tied to an interest rate index and have changing rates, which does not align with the specific definition of a term loan.

A loan that requires interest payments only until maturity is classified as a term loan. This type of loan structure typically means that the borrower pays only the interest accrued on the principal balance throughout the duration of the loan. At the end of the term, the entire principal amount is due, which can be a significant balloon payment unless the loan has a refinancing provision.

In the context of real estate financing, term loans can be advantageous for borrowers who want to maintain lower monthly payments and perhaps plan to sell or refinance the property before the principal is due. This characteristic distinguishes term loans from amortized loans, where both principal and interest are paid down over the life of the loan, and from balloon loans, which also involve a large final payment but typically follow an amortization schedule until that point. Adjustable-rate mortgages are tied to an interest rate index and have changing rates, which does not align with the specific definition of a term loan.