A loan where payments do not cause the principal to increase or decrease is known as what type of loan?

A loan where payments do not cause the principal to increase or decrease is known as what type of loan?

• A. Adjustable Rate
• B. Amortized
• C. Interest Only
• D. Fixed Rate

Answer: (C)

A loan where the payments do not reduce or increase the principal amount is classified as an interest-only loan. In this structure, the borrower is making payments solely on the interest charges for a specific period. Therefore, the principal balance remains unchanged during this time. With interest-only loans, once the interest-only period ends, the borrower typically has to begin repaying the principal, which may lead to significantly higher payments at that point. This type of loan can be attractive for individuals who expect to have increased income in the future or are looking to minimize their monthly payment initially. In contrast, amortized loans involve regular payments that consist of both principal and interest, gradually reducing the outstanding balance over time, while fixed-rate and adjustable-rate loans pertain to the variability of the interest rate rather than the structure of principal payments.

A loan where the payments do not reduce or increase the principal amount is classified as an interest-only loan. In this structure, the borrower is making payments solely on the interest charges for a specific period. Therefore, the principal balance remains unchanged during this time.

With interest-only loans, once the interest-only period ends, the borrower typically has to begin repaying the principal, which may lead to significantly higher payments at that point. This type of loan can be attractive for individuals who expect to have increased income in the future or are looking to minimize their monthly payment initially.

In contrast, amortized loans involve regular payments that consist of both principal and interest, gradually reducing the outstanding balance over time, while fixed-rate and adjustable-rate loans pertain to the variability of the interest rate rather than the structure of principal payments.