Which payment method allows for lower initial payments followed by a lump sum at the end?

The correct answer is a balloon loan, which is designed to have lower initial payments that are followed by a large lump sum payment at the end of the loan term. This structure can be particularly appealing for borrowers who may expect their financial situation to improve over time, allowing them to easily pay off the larger sum when due.

In a balloon loan, the borrower typically pays interest only or a very small principal amount at the beginning, making the initial payments more manageable. The critical feature is that at the end of the loan term, the remaining balance becomes due in one substantial payment. This type of loan is often utilized in short-term financing scenarios or in situations where the borrower expects to refinance or sell the asset prior to the maturity date.

Other loan types operate under different principles. An equity loan typically involves borrowing against the value of a property already owned, often structured differently, such as a home equity line of credit. An amortized loan features equal payments throughout the loan term, where each payment reduces the principal, leading to the loan being fully paid off by maturity. An installment loan involves fixed payments of principal and interest over a predetermined period, without the lump sum element found in a balloon loan.