A loan that requires regular payments of both principal and interest is known as what?

A loan that requires regular payments of both principal and interest is termed a fully amortized loan. This type of loan structure ensures that each payment contributes toward both the interest accrued and the outstanding loan balance (principal). Over the life of the loan, these payments are calculated such that the borrower pays off the loan in full, including interest, by the maturity date, resulting in a zero balance.

In contrast to other loan types, such as an interest-only loan, where payments only cover the interest and do not reduce the principal, or a balloon mortgage, which typically requires smaller payments initially with a large lump sum payment due at the end, a fully amortized loan evenly distributes payments throughout the loan term. This offers predictability in budgeting and ensures that the borrower builds equity in the property over time. Additionally, while a fixed payment loan does imply a constant payment schedule, without the specific inclusion of principal repayment, it does not fully capture the essence of how fully amortized loans function in repaying both principal and interest. Thus, identifying the correct term as a fully amortized loan highlights the integral aspect of regular principal payments along with interest.