Amortized Loan

### What is an amortized loan? - [ ] A loan where payments only go towards the interest. - [ ] A loan with payments that do not change over time. - [ ] A loan where payments include both principal and interest. - [x] A loan where the balance increases with each payment. > **Explanation:** An amortized loan means the borrower makes scheduled repayments that cover both interest and principal amounts, reducing the total loan balance over time. ### What is often the end result of an amortized loan? - [x] The loan is fully paid off, with no outstanding balance. - [ ] The principal remains unchanged, with only the interest paid off. - [ ] The balance is due at the end in a lump-sum payment. - [ ] The loan term is extended. > **Explanation:** The end result of an amortized loan is typically zero balance, as both interest and principal are paid down over the life of the loan. ### In an amortized loan, what happens to the payment composition over time? - [ ] Both the principal and interest portions remain equal. - [ ] The principal portion decreases while the interest portion increases. - [x] The principal portion increases while the interest portion decreases. - [ ] The payment amount drastically changes. > **Explanation:** In an amortized loan, as more principal is paid down, the interest portion of the payments gradually decreases, while the principal portion increases. ### Which of the following loans is an example of an amortized loan? - [ ] Credit Card Debt - [x] Home Mortgage - [ ] Payday Loan - [ ] Interest-Only Loan > **Explanation:** A home mortgage is a typical example of an amortized loan where regular payments are made towards both the principal and the interest. ### What is a key characteristic of an interest-only loan as compared to an amortized loan? - [ ] The monthly payments are higher. - [ ] Interest rates are fixed. - [ ] Payments include both interest and principal. - [x] Initial payments only cover the interest. > **Explanation:** In an interest-only loan, initial payments cover just the interest, with no principal reduction until a later period or at the end of the loan term. ### Amortization helps to... - [x] Systematically reduce the principal owed. - [ ] Increase the loan's balance. - [ ] Keep the interest rate constant. - [ ] Extend the loan duration. > **Explanation:** Amortization involves making regular payments to gradually reduce the principal amount owed on the loan. ### What is the key benefit of an amortized loan for borrowers? - [x] Predictable, structured payment plan. - [ ] Lower interest rates compared to other loans. - [ ] Interest payments only during the later stages. - [ ] Interest rate flexibility. > **Explanation:** The primary benefit for borrowers is having a predictable and structured payment plan, allowing them to manage their finances effectively. ### Is it possible to refinance an amortized loan? - [x] Yes, to obtain better terms/rates. - [ ] No, these loans cannot be modified. - [ ] Yes, but only within the first year. - [ ] Only with lender's discretion. > **Explanation:** Amortized loans can be refinanced, typically to secure more favorable interest rates or adjust the loan term length. ### Does refinancing an amortized loan affect the repayment schedule? - [x] Yes, it often adjusts both interest rates and the term length. - [ ] No, it keeps original terms intact. - [ ] Only if the loan was not amortized initially. - [ ] Yes, but only the interest rate changes. > **Explanation:** Refinancing can impact the repayment schedule by altering the interest rates and/or the length of the loan term, potentially lowering the monthly payments. ### Which of the following components of an amortized loan payment is typically higher during the early stages? - [ ] Principal - [x] Interest - [ ] Both remain equal - [ ] Tax-deductible portion > **Explanation:** During the early stages of an amortized loan, the interest component of the payment is typically higher than the principal component.