What characterizes a term loan?

What characterizes a term loan?

• A. Monthly payments include both principal and interest
• B. The full balance is due as a balloon payment at the end
• C. It is guaranteed by real estate collateral
• D. It has a lower interest rate compared to other loans

Answer: (B)

A term loan is typically characterized by its repayment structure, which often involves a significant end payment, known as a balloon payment. This means that while borrowers may make regular payments over the life of the loan, these payments may only cover interest or a portion of the principal. As a result, the full remaining balance of the loan becomes due at the end of the term in one lump sum. This structure can be beneficial for borrowers who expect to have a larger sum of cash available at the end of the term to pay off the loan completely. Understanding the term loan's characteristics is crucial for borrowers and appraisers alike. It highlights the importance of managing cash flow and being prepared for the balloon payment, as it can impact financial planning and the evaluation of the property's potential value and return on investment.

A term loan is typically characterized by its repayment structure, which often involves a significant end payment, known as a balloon payment. This means that while borrowers may make regular payments over the life of the loan, these payments may only cover interest or a portion of the principal. As a result, the full remaining balance of the loan becomes due at the end of the term in one lump sum. This structure can be beneficial for borrowers who expect to have a larger sum of cash available at the end of the term to pay off the loan completely.

Understanding the term loan's characteristics is crucial for borrowers and appraisers alike. It highlights the importance of managing cash flow and being prepared for the balloon payment, as it can impact financial planning and the evaluation of the property's potential value and return on investment.