What is the process called that outlines required payments including principal and interest over time?

What is the process called that outlines required payments including principal and interest over time?

• A. Refinancing
• B. Amortization
• C. Restructuring
• D. Securitization

Answer: (B)

The process that outlines required payments, including both principal and interest, over time is known as amortization. This term refers specifically to the method of spreading out a loan into a series of fixed payments over its term. Each payment includes a portion that pays down the principal (the original amount borrowed) and a portion that covers the interest charged on the remaining balance. As the loan matures, the portion of each payment that goes toward principal increases, while the portion that goes toward interest decreases. Understanding amortization is crucial for borrowers because it provides clarity on how payments are structured throughout the life of a loan, enabling better budgeting and financial planning. This also helps borrowers to comprehend when they can expect to build equity in their property, as greater principal repayment occurs later in the loan period.

The process that outlines required payments, including both principal and interest, over time is known as amortization. This term refers specifically to the method of spreading out a loan into a series of fixed payments over its term. Each payment includes a portion that pays down the principal (the original amount borrowed) and a portion that covers the interest charged on the remaining balance. As the loan matures, the portion of each payment that goes toward principal increases, while the portion that goes toward interest decreases.

Understanding amortization is crucial for borrowers because it provides clarity on how payments are structured throughout the life of a loan, enabling better budgeting and financial planning. This also helps borrowers to comprehend when they can expect to build equity in their property, as greater principal repayment occurs later in the loan period.