What characterizes a partially amortized loan?

A partially amortized loan is characterized by the requirement of a balloon payment at the end of the loan term. In this type of loan, monthly payments are made that cover only a portion of the principal and interest over the term of the loan. As a result, at the end of the loan period, the borrower must pay off the remaining balance in a lump sum, known as the balloon payment. This structure allows for lower monthly payments compared to fully amortized loans, but the need for a significant payment at the end introduces a potential financial challenge for borrowers who may not be prepared for it.

In contrast, fully amortized loans require consistent payments that cover both principal and interest over the entire term, eliminating the need for a balloon payment at maturity. Interest-only loans differ fundamentally as they do not amortize the principal at all during the life of the loan, resulting in the full principal balance due at maturity without any reduction. Lastly, while variable interest rates can exist in various loan structures, they are not a defining characteristic of a partially amortized loan.