A term or partial amortization loan is structured such that the borrower makes regular payments over the loan term, but these payments do not fully settle the loan balance. At the end of the loan term, there is often a large, lump-sum payment known as a "balloon payment" due to cover the remaining loan balance.
Let's examine each of the given options to determine the correct disadvantage:
A) The balloon payment due at the end of the term: This option means that the borrower must make a large, final payment to fully repay the loan. This can be a significant burden if the borrower isn't prepared for it.
B) The longer term of repayment required: Term or partial amortization loans typically have a shorter-term structure with the large final balloon payment, unlike fully amortized loans which spread repayment over a longer period. Therefore, this is not a specific disadvantage of these types of loans.
C) The higher loan-to-value (LTV) ratio required: This is not inherently a feature of term or partial amortization loans. The LTV ratio is usually determined by the lender's criteria and the type of loan product offered.
D) The higher interest costs: While this can sometimes be the case depending on the loan terms, the most specific and clear disadvantage of a term or partial amortization loan compared to a fully amortized loan is the balloon payment.
Based on the examination of the options, the disadvantage of a term or partial amortization loan over a fully amortized loan is:
A) The balloon payment due at the end of the term.
