Which type of loan requires a large final payment because it does not fully amortize?

A balloon loan is a specific type of loan characterized by its amortization schedule and its payment structure. Unlike fully amortizing loans, which spread payments evenly over the loan term resulting in a zero balance at maturity, balloon loans involve lower monthly payments that do not cover the full interest and principal repayment over the term. Therefore, at the end of the loan term, the borrower must make a large final payment, known as a "balloon payment." This final payment is significantly larger than the preceding payments and often the entire remaining balance of the loan.

In contrast, conventional, fixed-rate, and adjustable-rate loans typically are structured to fully amortize over their terms, meaning that by the time the last payment is made, the loan will be completely paid off without any large final balloon payment required. This makes understanding balloon loans crucial for borrowers, as they can potentially lead to financial strain if the large final payment is not anticipated or prepared for.