What is a key feature of an amortized loan?

An amortized loan is specifically designed so that each payment made by the borrower includes both principal and interest, gradually reducing the outstanding balance over the loan term. The key feature of this type of loan is that the amortization schedule ensures that with each payment, a portion goes toward paying down the principal amount borrowed, while the rest covers the interest cost. As the principal reduces, the interest portion of the payments also decreases, allowing the borrower to pay off the loan completely by the end of the term. This structured approach provides clarity and predictability in repayment, making it a popular choice for borrowers seeking to finance large purchases, such as homes or vehicles.

In contrast to this, an arrangement that requires only interest payments would not contribute to reducing the principal, and payments made only at the end of the term would typically reflect a different loan structure, such as a balloon loan. Similarly, being secured solely by personal property does not inherently define the structure or characteristics of the loan's amortization; many amortized loans can be secured by various types of assets, including real estate.