What type of loan allows for equal regular payments of principal and interest over a set term?

An amortized loan is characterized by equal regular payments that cover both principal and interest over a predetermined loan term. This structure ensures that each payment reduces the principal amount owed while simultaneously paying off the interest accrued. Over time, as the principal decreases, the portion of each payment that goes toward interest also decreases, making a larger portion of the monthly payment apply toward the principal. This type of loan provides borrowers with a clear repayment schedule, allowing them to plan their finances effectively, as they know exactly how much they will pay each month.

Other types of loans offer different payment structures. For example, a balloon loan typically involves smaller payments for a certain period followed by a large final payment (or "balloon payment"), which does not have the consistent monthly debt reduction that amortized loans provide. An interest-only loan allows borrowers to pay only the interest for a set time, meaning that the principal remains unchanged until the end of the term. Lastly, a variable-rate loan has payments that may change based on interest rate fluctuations, which contrasts with the predictable payment structure of an amortized loan.