Question

A(n) ________ loan has regular payments that include both principal and interest but these payments are insufficient to pay off the loan.

Group of answer choices

interest-only

perpetual

pure discount

balloon

continuing

Answer 1

Answer: balloon loan.

A balloon loan is not fully amortized over its term. The principal portion included in regular payments does not cover the full principal amount and thus, a balloon payment or a lumpsum payment is required to be made at the end of the loan's term.

• An interest only loan is a type of loan in which only interest is required to be paid during the interest-only term. After the interest only period, the loan is converted to a regular amortized loan or the principal is repaid.
• Pure discount loan: borrower doesn't pay any interest. Upon maturity, the principal (face value) is repaid. They are issued at discount. E.g. zero coupon bond.
• Perpetual loan: principal is never repaid and interest is paid forever.