Which type of loan involves periodic payments of both principal and interest?

An amortized loan is one where periodic payments are made that cover both principal and interest. This means that with each payment, the borrower reduces their total loan balance while also paying off the interest that has accrued. Over the life of the loan, the payment structure is designed so that the borrower ultimately pays off the entire amount borrowed plus interest by the end of the loan term.

This structure provides clarity and predictability for borrowers, as they can anticipate their monthly payments over time. Unlike interest-only loans, where only interest is paid during the initial period, an amortized loan ensures that the borrower is consistently reducing the outstanding balance, leading to full repayment. Additionally, while options like partially amortized loans and balloon mortgages may have elements of structured payments, they do not completely fulfill the criteria of consistent payments toward both principal and interest through the life of the loan.