What type of loan would require the borrower to make smaller monthly payments but a larger payoff at end of term?

A balloon loan is characterized by the requirement for smaller monthly payments throughout the life of the loan, with a significant final payment—often much larger than the regular payments—due at the end of the term. This structure allows borrowers to benefit from lower monthly cash outflows, which can be appealing for those who may only need the loan for a short period or anticipate increased income or refinancing options in the future.

In contrast, a fixed-rate loan involves consistent payments that cover both the interest and principal over the life of the loan, leading to complete amortization by the end of the term. An adjustable-rate loan features variable monthly payments that can change at set intervals based on market conditions but typically does not result in a large final payment. An interest-only loan allows the borrower to pay only the interest for a specified period, often leading to a lump sum due at the end, but the payments can be similar to those of a standard loan before that point. The defining characteristic of a balloon loan is the substantial payment that comes due at the end, distinguishing it from other loan types.