What kind of a loan would be fully paid out over the life of the loan?

What kind of a loan would be fully paid out over the life of the loan?

• A. Balloon loan
• B. Interest-only loan
• C. Fully amortized loan
• D. Variable-rate loan

Answer: (C)

Understanding how a loan is paid off over time through amortization helps explain this concept. In a fully amortized loan, each regular payment includes both interest and a portion of the principal, and the payment schedule is designed so that the entire loan balance is retired by the end of the term. In other words, after the final payment there is no remaining balance. This is different from a balloon loan, which keeps paying a smaller amount for most of the term but leaves a large lump sum to be paid at the end. It’s also different from an interest-only loan, where payments for a period cover only interest and do not reduce the principal. A variable-rate loan changes interest over time, but it can still be structured to amortize if payments are set to retire the loan by the end; the key distinction in this question is the plan to pay off the principal in full by the end of the term, which is the hallmark of a fully amortized loan.

Understanding how a loan is paid off over time through amortization helps explain this concept. In a fully amortized loan, each regular payment includes both interest and a portion of the principal, and the payment schedule is designed so that the entire loan balance is retired by the end of the term. In other words, after the final payment there is no remaining balance.

This is different from a balloon loan, which keeps paying a smaller amount for most of the term but leaves a large lump sum to be paid at the end. It’s also different from an interest-only loan, where payments for a period cover only interest and do not reduce the principal. A variable-rate loan changes interest over time, but it can still be structured to amortize if payments are set to retire the loan by the end; the key distinction in this question is the plan to pay off the principal in full by the end of the term, which is the hallmark of a fully amortized loan.