Fully Amortized Loan

### In a fully amortized loan, what happens to the loan balance at the end of the term? - [ ] It remains the same. - [ ] It increases. - [x] It is fully paid off. - [ ] It must be refinanced. > **Explanation:** In a fully amortized loan, regular payments covering both principal and interest ensure the loan balance is fully paid off by the end of the term. ### How does the principal portion of the payment change over time in a fully amortized loan? - [ ] It stays the same. - [ ] It decreases. - [x] It increases. - [ ] It fluctuates. > **Explanation:** The principal portion of each payment in a fully amortized loan increases over time while the interest portion decreases. ### What is the main characteristic of a fully amortized loan? - [x] Payments that fully pay off the loan over the term. - [ ] Payments that cover only the interest. - [ ] A high variable interest rate. - [ ] Large balloon payments at the end. > **Explanation:** The main characteristic is that regular payments are made throughout the term that cover both principal and interest, ensuring the loan is fully paid off by the end. ### Which statement is true about the payment amount in a fixed-rate fully amortized loan? - [x] The payment amount remains constant over the term of the loan. - [ ] The payment amount increases over time. - [ ] The payment amount decreases over time. - [ ] The payment amount fluctuates with market rates. > **Explanation:** In a fixed-rate fully amortized loan, the payment amount remains the same throughout the loan term, although the split between principal and interest changes. ### What is an amortization schedule? - [x] A detailed breakdown showing the allocation of each payment toward principal and interest. - [ ] A document outlining the interest rate terms. - [ ] A timetable for loan disbursements. - [ ] An appointment schedule with a loan officer. > **Explanation:** An amortization schedule is a table that provides a detailed breakdown of each payment on a loan, illustrating the portion applied to interest and principal and how the loan balance decreases over time. ### How do extra payments impact a fully amortized loan? - [ ] They increase the interest paid. - [ ] They increase the loan term. - [x] They reduce the principal faster. - [ ] They have no effect. > **Explanation:** Extra payments reduce the principal balance faster, thereby shortening the loan term and reducing the total interest paid over the life of the loan. ### What happens to the interest portion of a fully amortized loan payment over time? - [ ] It increases. - [x] It decreases. - [ ] It remains constant. - [ ] It doubles every year. > **Explanation:** The interest portion of each payment decreases over time as the principal is gradually paid down. ### Why might someone choose a fully amortized loan over an interest-only loan? - [ ] To reduce monthly payment amounts. - [x] To pay off the debt entirely by the loan term end. - [ ] To pay interest faster. - [ ] To delay repayment of principal. > **Explanation:** Borrowers might choose a fully amortized loan to ensure the debt is completely repaid by the end of the period, unlike an interest-only loan where significant principal repayment is delayed. ### What type of term is used to describe a loan like a fully amortized loan? - [x] Self-liquidating. - [ ] Interest-focused. - [ ] Adjustable-rate. - [ ] Balloon payment. > **Explanation:** A fully amortized loan is described as self-liquidating because payments include both principal and interest and fully pay off the loan over its term. ### Can a fully amortized loan have a variable interest rate? - [ ] No, it must have a fixed rate. - [x] Yes, it can. - [ ] Only if it's a short-term loan. - [ ] Only for commercial purposes. > **Explanation:** A fully amortized loan can have a variable interest rate, meaning the interest rate can change over time according to market conditions, although fixed rates are common.