Question

when amortizing a loan the size of each payment _____ while the portion of each payment that goes toward accrued interest _______.

A: increases; stays the same

B: decreases; stays the same

C: stays the same; decreases

D: stays the same; increases

Answer 1

An amortized loan payment first pays off the interest expense for the period; any remaining amount is put towards reducing the principal amount. As the interest portion of the payments for an amortization loan decreases, the principal portion increases. The overall size of each payment remains the same.

Hence, when amortizing a loan the size of each payment stays the same while the portion of each payment that goes toward accrued interest decreases.

The correct answer is Option C: stays the same; decreases