What is an amortized loan?

An amortized loan is characterized by being repaid through equal periodic installments over the life of the loan. Each installment typically includes both principal and interest, allowing the borrower to pay down the loan balance gradually throughout the loan term. Because this type of loan structure provides predictable payment amounts, it can simplify budgeting for borrowers.

This approach contrasts with other loan types. For example, a loan with only interest payments would not reduce the principal balance during the repayment period, which can lead to a larger amount owed at the end of the term. Loans with varying payment amounts can lead to unpredictability in budgeting, and a loan that extends beyond 30 years may refer to terms not typically associated with standard amortized loans, which commonly span 15 to 30 years. Therefore, the option that describes an amortized loan accurately is the one that specifies equal periodic installments.