Where this fits on the exam
| Official syllabus topic | Financing: Loan Types; Amortization and Balloon Payments |
|---|---|
| Official PSI area | Financing |
| Published weight | 10% of the national portion |
| Source edition | PSI Georgia Candidate Information Bulletin dated July 1, 2026 |
The Rule
PSI publishes a weight for the complete official area, not a guaranteed count for this individual comparison. Use the source, document, actor, event, and timing stated in the question before applying a memorized definition.
Side-by-side comparison
Read across each row. The terms are deliberately compared on identical dimensions so the difference remains clear when the exam hides the vocabulary inside a scenario.
| Decision dimension | Fully amortized | Balloon | Interest-only |
|---|---|---|---|
| Scheduled principal | Principal is reduced to zero by maturity | Payments do not fully retire principal before maturity | No principal during the interest-only period |
| At maturity | No scheduled principal balance remains | Large remaining balance is due | Outstanding principal is due at maturity; the interest-only period may end earlier and payments may then begin amortizing |
| Payment risk | Payment structure is designed for full payoff | Refinance or payoff risk at maturity | Principal does not fall during the interest-only period |
| Exam clue | Zero balance at final scheduled payment | Final payment much larger | Periodic payment covers interest but not principal |
Decision rule
Georgia-specific distinction
Worked example
Scenario. A five-year note uses monthly payments calculated on a 30-year amortization schedule, with the unpaid balance due after year five.
Reason it through. The payments reduce some principal but cannot retire a 30-year balance within five years.
Answer. The note is partially amortized with a balloon payment at maturity.
Common exam traps
- Calling every level-payment loan fully amortized
- Confusing loan term with amortization period
- Assuming interest-only means no payment
- Ignoring the final balance
Original practice questions with detailed explanations
These are original instructional questions mapped to the July 1, 2026 PSI outline. They are not copied from PSI or any live examination. Choose an answer before opening the explanation.
Question 1A seven-year note has monthly payments calculated on a 30-year schedule, with the unpaid balance due at the end of year seven. What kind of loan is this?
- A. Fully amortized
- B. Interest-only
- C. Partially amortized with a balloon
- D. Negatively amortized
Show answer and explanation →
Answer: C. Partially amortized with a balloon
Payments figured on a 30-year schedule reduce some principal, but not nearly enough to retire the debt in seven years, so a large balloon payment is due at maturity. Monthly payments alone do not make a loan fully amortized. Confusing the seven-year term with the 30-year amortization period is the trap.
- A. Incorrect. A 30-year payment schedule will not retire the principal within the seven-year term. A balance remains due.
- B. Incorrect. Payments calculated on an amortizing schedule ordinarily include principal as well as interest. This is not an interest-only period.
- C. Correct. The note amortizes only part of the balance before year seven. The remaining principal is due as a balloon at maturity.
- D. Incorrect. Negative amortization occurs when payments fail to cover accrued interest and unpaid interest increases principal. That is not what the stated schedule describes.
Question 2A $200,000 loan is interest-only for the first ten years at 6% annual interest, paid monthly. What is the monthly payment during that period?
- A. $1,555.56
- B. $1,199.10
- C. $12,000.00
- D. $1,000.00
Show answer and explanation →
Answer: D. $1,000.00
Interest-only payments cover just the interest: $200,000 x 6% = $12,000 a year, or $1,000 a month, and the balance stays at $200,000. $12,000 is the annual figure, $1,199.10 is a fully amortizing 30-year payment, and $1,555.56 adds straight-line principal of $555.56 to the interest.
- A. Incorrect. $1,555.56 adds $555.56 straight-line monthly principal to $1,000 interest. An interest-only payment includes no scheduled principal reduction.
- B. Incorrect. About $1,199.10 is a 30-year fully amortizing payment for $200,000 at 6 percent. That is a different payment structure.
- C. Incorrect. $200,000 × 0.06 = $12,000 is annual interest. Divide by 12 for the requested monthly payment.
- D. Correct. $200,000 × 0.06 ÷ 12 = $1,000 per month. The principal remains $200,000 during the stated interest-only period.
Question 3Which statement describes a fully amortized loan?
- A. Each payment is equal, so no balloon can exist
- B. Scheduled payments bring the balance to zero at maturity
- C. Payments cover only interest until the final payment
- D. The final payment is much larger than the others
Show answer and explanation →
Answer: B. Scheduled payments bring the balance to zero at maturity
A fully amortized loan's scheduled payments reduce the principal to zero by maturity. Equal payments alone do not prove full amortization, since a balloon note can also have level payments. The last two choices describe interest-only and balloon structures.
- A. Incorrect. A balloon loan can have equal installments until maturity. Equal payment amounts alone do not establish full amortization.
- B. Correct. Full amortization means the scheduled payments retire principal by the maturity date, leaving no balloon balance.
- C. Incorrect. Paying interest only leaves principal to be repaid later. That does not fully amortize the loan during that period.
- D. Incorrect. A substantially larger final payment indicates a balloon balance, rather than a fully amortized schedule.
Ready to move on?
You have this distinction down when all of these are true.
- Define every compared term without using the other term as the definition.
- Rebuild the comparison table from memory.
- State the decision rule and Georgia distinction without notes.
- Solve the worked example after changing one key fact.
- Explain the rule or fact that makes each distractor wrong.
- Answer all three original questions correctly in mixed practice on a later day.
Recommended next lesson
Continue with Fixed-Rate Versus Adjustable-Rate Mortgage. Amortization tells you how principal falls; Fixed-Rate Versus Adjustable-Rate Mortgage adds the other moving part, showing how an ARM's index, margin and caps can change the rate and payment.
Return to the complete exam-concept library or the Financing hub.