How does an amortized loan function?

An amortized loan functions by requiring the borrower to make equal payments over the life of the loan. Each payment includes a portion that goes toward repaying the principal amount borrowed and a portion that covers the interest on the outstanding balance. This structured repayment method ensures that the loan is fully paid off by the end of its term, with the balance decreasing over time as more principal is repaid with each payment. This predictable payment schedule helps borrowers budget effectively, as they know exactly how much they will need to pay each period.

In contrast, other options do not accurately describe the nature of an amortized loan. For instance, requiring one large payment at the end is characteristic of a balloon loan, while irregular payment amounts refer to a flexible or variable payment structure. An interest-only loan, on the other hand, involves making payments solely on the interest portion until the maturity date when the full principal must be repaid. Each of these alternatives differs fundamentally from the predictable, structured repayment format of an amortized loan.