Which loan is known as a straight term loan and requires payments that are interest-only for the term?

• A. Open end loan
• B. Straight loan
• C. Fully amortized loan
• D. Construction loan

Answer: (B)

A straight loan is defined by paying only interest during the term, with the principal due in full at maturity. That means each payment covers just the cost of borrowing money for that period, and no portion reduces the loan balance until the end. Because you aren’t amortizing the principal, the loan sticks around as a balloon payment when the term ends, unless you refinance or pay the lump sum. This structure is common when the borrower expects to arrange another loan, sell the asset, or otherwise obtain funds to repay the principal at the end.

In contrast, an open-end loan is a revolving line of credit you can borrow from and repay repeatedly, not a fixed-term, interest-only schedule. A fully amortized loan requires payments that include both interest and principal every period so the loan is paid off by the end. A construction loan funds construction and is typically interest-only during the building phase, often converting to a permanent loan later.