What is a fully amortized loan?

A fully amortized loan is defined as a loan that is paid off gradually over time through regular payments that include both principal and interest. Each payment is calculated to ensure that by the end of the loan term, the entire balance is paid off completely. This means that as you make payments, you are not only covering the interest on the loan but also reducing the principal amount, leading to the eventual zero balance when the loan matures.

The payments in a fully amortized loan are structured in such a way that they remain level for the duration of the loan term. This provides borrowers with the predictability of consistent monthly expenses. As more payments are made, a greater portion of the payment goes towards paying down the principal due to the decreasing interest amount owed on the loan.

In contrast, the other described types of loans do not feature full amortization. Interest-only loans require just the interest to be paid for a certain period without reducing the principal. Loans with varying payment amounts fluctuate in payment size, which can make budgeting more challenging. Single payment loans require the borrower to pay back the entire amount borrowed all at once at maturity, which does not allow for gradual reduction of the debt throughout the term. Thus, the concept of full amortization is crucial in