Which of the following would require regular principal and interest payments for the life of the loan? a. Bridge loan b. Term loan c. Revolving line of credit d. (a) and (c) only e. All of the above
The correct answer and explanation is:
Correct Answer: b. Term loan
Explanation (300 words):
A term loan is a type of loan that is repaid in regular installments over a fixed period, typically including both principal and interest. These payments are made monthly, quarterly, or annually, depending on the terms agreed upon with the lender. The defining feature of a term loan is that it has a clear amortization schedule — meaning the loan is paid down over time in predictable, structured payments. Term loans are commonly used to finance equipment, real estate, or business expansion.
In contrast, a bridge loan is a short-term loan intended to “bridge” a gap between two financing periods — for example, providing funds until long-term financing is secured or an asset is sold. While it may involve interest payments during its term, it typically does not require regular principal repayments throughout the life of the loan. Instead, the full principal is often due at maturity.
A revolving line of credit allows borrowers to draw, repay, and redraw funds up to a certain limit. Interest is usually only paid on the amount currently borrowed, and principal repayments are flexible, depending on usage. This type of credit is commonly used for working capital and does not follow a fixed repayment schedule like a term loan.
Therefore, only the term loan (option b) mandates regular payments of both principal and interest throughout its duration. Bridge loans and revolving lines of credit do not have the same requirement for structured, consistent principal and interest payments.
Summary:
- Term Loan (b): Regular principal + interest payments → ✅
- Bridge Loan (a): Typically interest-only, short-term → ❌
- Revolving Line of Credit (c): Flexible repayment → ❌
Thus, the correct answer is b. Term loan.