What term describes the scheduled loan repayment that reduces both principal and interest?

What term describes the scheduled loan repayment that reduces both principal and interest?

• A. Amortization
• B. Refinancing
• C. Balloon Payment
• D. Escrow

Answer: (A)

Amortization refers to the process of repaying a loan over time through scheduled payments that go towards both the principal amount borrowed and the interest accrued. This method gradually decreases the principal balance, while also ensuring that interest costs are paid off in a structured manner. Each payment made is divided into two parts: a portion that reduces the principal and a portion that covers the interest. As the principal decreases with each payment, the interest portion of subsequent payments also decreases, which results in a structured and predictable payment schedule that benefits both the borrower and the lender. This is a standard practice for loans such as mortgages, where the goal is to fully repay the loan amount by the end of the term. Other terms such as refinancing typically involve replacing an existing loan with a new one, often with different terms. A balloon payment describes a large payment due at the end of a loan term that may not have been amortized over the life of the loan, potentially leaving a large balance unpaid until the end. Escrow refers to an arrangement where a third party holds and manages funds or assets on behalf of two parties until a particular condition is met, and does not relate directly to loan repayment structure.

Amortization refers to the process of repaying a loan over time through scheduled payments that go towards both the principal amount borrowed and the interest accrued. This method gradually decreases the principal balance, while also ensuring that interest costs are paid off in a structured manner.

Each payment made is divided into two parts: a portion that reduces the principal and a portion that covers the interest. As the principal decreases with each payment, the interest portion of subsequent payments also decreases, which results in a structured and predictable payment schedule that benefits both the borrower and the lender. This is a standard practice for loans such as mortgages, where the goal is to fully repay the loan amount by the end of the term.

Other terms such as refinancing typically involve replacing an existing loan with a new one, often with different terms. A balloon payment describes a large payment due at the end of a loan term that may not have been amortized over the life of the loan, potentially leaving a large balance unpaid until the end. Escrow refers to an arrangement where a third party holds and manages funds or assets on behalf of two parties until a particular condition is met, and does not relate directly to loan repayment structure.