Amortized Loan

    graph LR
	A[Monthly Payment] --> B[Interest Payment]
	A --> C[Principal Payment]
	B --> |Decreasing Over Time| D[Outstanding Principal]
	C --> |Increasing Over Time| D

## What is the primary characteristic of an amortized loan? - [x] Payments that cover both interest and principal - [ ] Payments that only cover interest - [ ] Payments that vary significantly month to month - [ ] Payments that are not required > **Explanation:** An amortized loan requires payments that contribute to both the interest owed and the principal balance. ## At the beginning of an amortized loan, which portion of the payment is typically larger? - [x] Interest portion - [ ] Principal portion - [ ] They are equal - [ ] Payment is not calculated in parts > **Explanation:** In the initial phases, the interest portion is usually larger as it is calculated on the higher principal balance. ## What happens to the principal and interest payments over the term of an amortized loan? - [ x] Principal payments increase while interest payments decrease - [ ] Both increase - [ ] Both decrease - [ ] Neither changes > **Explanation:** As time passes, the interest payments decrease, and the amount going towards the principal increases. ## Which formula is used to calculate the monthly payment on an amortized loan? - [ ] M = P(1 + r)^n - [ ] M = P \frac{r(1+r)^n}{(1+r)^n-1} - [ x] M = P \frac{r(1+r)^n}{(1+r)^n-1} - [ ] M = P(r/n) > **Explanation:** The correct formula for calculating the monthly payment of an amortized loan is indeed M = P \frac{r(1+r)^n}{(1+r)^n-1}. ## After making an extra payment, which component of your loan is reduced? - [ ] Only the interest amount - [x] The principal amount - [ ] Both the interest and principal equally - [ ] None; extra payments are just a suggestion > **Explanation:** When you make an extra payment on an amortized loan, it directly reduces the principal amount, lowering future interest. ## How does making extra payments affect the loan duration? - [x] It shortens the duration of the loan - [ ] It keeps the duration the same - [ ] It increases the duration - [ ] Duration is irrelevant in amortization > **Explanation:** Extra payments can significantly shorten the duration you will owe on the loan since you’re reducing the principal faster. ## What is an amortization schedule? - [ ] A document that states how much you owe in total over time - [ ] A plan to pay only interest every month - [x] A table outlining each payment for the life of the loan - [ ] A procedure for extending the loan term > **Explanation:** An amortization schedule is a detailed breakdown of every payment, showing how much goes to interest versus principal throughout the loan. ## In an amortization schedule, when does the interest component start to decline? - [ ] From the first payment - [x] Over time as the principal decreases - [ ] Only at the end of the loan term - [ ] Whenever you feel like it > **Explanation:** The interest component starts to decline as the principal decreases over time, allowing for more of each payment to go towards paying down the principal. ## If you pay only the interest on an interest-only loan, what happens in the end? - [x] You still owe the original loan amount - [ ] You receive a refund for the extra amount paid - [ ] The loan is forgiven - [ ] You own the asset outright > **Explanation:** After only paying interest on an interest-only loan, you are still left with the full principal amount, which is due at the end. ## How do you feel toward your amortized loan after understanding it better? - [x] More empowered and less anxious - [ ] Like it’s a burden - [ ] Confused still - [ ] Ready to purchase a yacht > **Explanation:** With better understanding comes empowerment! What are debts if not an opportunity for personal financial growth?