What defines an amortising loan?

What defines an amortising loan?

• A. A loan repaid progressively over its term
• B. A loan which offers a lump sum repayment at the end
• C. A loan with flexible payment options
• D. A loan with variable interest rates

Answer: (A)

An amortising loan is characterized by its repayment structure, where the borrower makes regular payments over the term of the loan that include both principal and interest. This means that with each payment, a portion goes toward reducing the principal balance, while the other portion covers interest costs. As a result, by the end of the loan term, the entire balance is paid off. This systematic method of repayment makes amortising loans a common choice for mortgages and similar financing options. Other types of loans operate differently. For instance, loans that offer a lump sum repayment at the end require the borrower to pay back the full amount owed in one payment at maturity, which does not reduce the principal during the term. Flexible payment options or loans with variable interest rates may provide some adaptive features, but they do not inherently define the amortisation process, which is focused mainly on the structure of periodic repayments reducing the loan balance.

An amortising loan is characterized by its repayment structure, where the borrower makes regular payments over the term of the loan that include both principal and interest. This means that with each payment, a portion goes toward reducing the principal balance, while the other portion covers interest costs. As a result, by the end of the loan term, the entire balance is paid off. This systematic method of repayment makes amortising loans a common choice for mortgages and similar financing options.

Other types of loans operate differently. For instance, loans that offer a lump sum repayment at the end require the borrower to pay back the full amount owed in one payment at maturity, which does not reduce the principal during the term. Flexible payment options or loans with variable interest rates may provide some adaptive features, but they do not inherently define the amortisation process, which is focused mainly on the structure of periodic repayments reducing the loan balance.