Loan Amortization

### What does an amortization schedule show? - [x] The breakdown of each loan payment between principal and interest. - [ ] Only the total amount due at the end of the loan. - [ ] The varying interest rates over the loan term. - [ ] The borrower's credit score. > **Explanation:** An amortization schedule shows the breakdown of each loan payment, indicating the portion of each payment that goes towards principal repayment and interest. ### How does the interest portion of an amortized loan payment change over time? - [x] It decreases. - [ ] It increases. - [ ] It stays the same. - [ ] It depends on the borrower’s credit rating. > **Explanation:** The interest portion decreases over time because it is calculated on the remaining principal balance, which becomes smaller with each payment. ### Can extra payments on an amortized loan affect the overall loan term? - [x] Yes, they can shorten the loan term. - [ ] No, they only affect the monthly payment amount. - [ ] No, they have no effect on the loan term. - [ ] They only increase the interest payments. > **Explanation:** Extra payments go directly towards the principal, thereby reducing the outstanding balance faster and potentially shortening the overall loan term. ### What types of loans are commonly amortized? - [ ] Credit cards - [x] Mortgages - [x] Auto loans - [x] Student loans - [ ] Payday loans > **Explanation:** Mortgages, auto loans, and student loans are typically amortized, involving regular payments of principal and interest to fully repay the loan over a specified term. ### What portion of a typical mortgage payment is higher at the start of the loan? - [ ] Principal - [x] Interest - [ ] Taxes - [ ] Insurance > **Explanation:** At the start of an amortized mortgage loan, the interest portion is higher because it is based on the full principal balance. ### How often are payments typically made on an amortized loan? - [x] Monthly - [ ] Quarterly - [ ] Annually - [ ] Semi-annually > **Explanation:** Amortized loans usually require monthly payments, although some loan agreements might offer different schedules. ### What is the principal in the context of loan amortization? - [x] The initial amount of money borrowed. - [ ] The total interest paid over the loan term. - [ ] The borrower’s credit rating. - [ ] The annual income of the borrower. > **Explanation:** The principal refers to the initial amount of money borrowed from the lender. ### What happens if a borrower misses a scheduled payment on an amortized loan? - [ ] The interest rate decreases. - [x] Penalties may be applied and interest accrues on the missed payment. - [ ] The loan term gets automatically extended. - [ ] The loan balance is forgiven. > **Explanation:** Missing a scheduled payment often results in penalties and additional interest, along with potential damage to the borrower’s credit score. ### Why is loan amortization beneficial for borrowers? - [x] It provides predictable payments and clear debt reduction progress. - [ ] It automatically lowers interest rates over time. - [ ] It forgives a portion of the loan balance yearly. - [ ] It reduces the need for collateral. > **Explanation:** Loan amortization is beneficial as it offers predictable monthly payments and a clear path to fully repaying the loan by the end of the term. ### What is essential for creating an accurate amortization schedule? - [ ] Borrower’s employment history - [x] Loan principal, interest rate, and loan term - [ ] Borrower’s credit score - [ ] The lender's profit margin > **Explanation:** An accurate amortization schedule requires details on the loan principal, interest rate, and loan term to calculate how each payment affects the principal and interest.