What is the primary difference between a partially amortized loan and an interest-only term loan?

The primary difference between a partially amortized loan and an interest-only term loan lies in the structure of the payments and the final payoff at the end of the loan term. In a partially amortized loan, the borrower makes regular payments that cover both principal and interest, which reduces the principal balance over time. However, unlike a fully amortized loan, the remaining balance at the end of the term is due as a balloon payment.

In contrast, an interest-only loan requires the borrower to pay only the interest charged on the principal throughout the loan term. This structure means that the principal balance does not decrease during the term, resulting in a larger balloon payment at the end since the entire original loan amount is due then.

The option indicating that partially amortized loans have larger payments and a smaller balloon payment is correct. This is because the payments over the duration of the loan reduce the overall principal amount outstanding when compared to an interest-only loan. The result is a balloon payment that is smaller because part of the principal has already been paid down through regular payments.