Explain amortization in the context of loans.

Explain amortization in the context of loans.

• A. Making equal quarterly payments that only reduce interest.
• B. Spreading loan payments over time into principal and interest; reduces balance.
• C. Paying off the loan in a lump sum at maturity.
• D. Recording depreciation of assets.

Answer: (B)

Amortization is the process of paying off a loan over time with regular payments that cover both interest and principal. Each payment reduces the outstanding balance, so the loan is gradually paid down until it’s fully repaid. This means a portion of each payment goes to interest and a portion to reducing the principal, with the balance shrinking over the term. The description that talks about spreading payments over time into principal and interest and reducing the balance fits this idea best. The other options describe scenarios that aren’t amortization: paying only interest leaves the principal unchanged, paying off with a single lump-sum at maturity isn’t amortized, and depreciation relates to asset accounting, not loan repayment.

Amortization is the process of paying off a loan over time with regular payments that cover both interest and principal. Each payment reduces the outstanding balance, so the loan is gradually paid down until it’s fully repaid. This means a portion of each payment goes to interest and a portion to reducing the principal, with the balance shrinking over the term. The description that talks about spreading payments over time into principal and interest and reducing the balance fits this idea best. The other options describe scenarios that aren’t amortization: paying only interest leaves the principal unchanged, paying off with a single lump-sum at maturity isn’t amortized, and depreciation relates to asset accounting, not loan repayment.