A borrower reviews an amortization schedule and sees that the balance reaches zero after the final scheduled payment. What does this indicate?
Correct Answer
D) The loan is fully amortizing over the stated term
Why this is correct: A fully amortizing loan is designed so that the scheduled principal-and-interest payments repay the entire loan amount plus interest over the loan term. The balance reaching zero after the final scheduled payment is the defining characteristic of a fully amortizing loan. Why the other choices are wrong: 'The loan has negative amortization' is wrong because negative amortization occurs when payments are insufficient to cover interest, causing the loan balance to increase, not decrease to zero. 'The interest rate must be adjustable' is wrong because a fixed-rate loan can also be fully amortizing; the amortization pattern is independent of whether the rate is fixed or adjustable. 'Only interest is paid during the term' is wrong because an interest-only loan would leave the full principal balance unchanged until a balloon payment, not reach zero. Exam tip: For amortization questions, remember: 'Fully amortizing' = balance goes to zero; 'Interest-only' = balance stays flat; 'Negative amortization' = balance grows.
Why This Is the Correct Answer
Why this is correct: A fully amortizing loan is designed so that the scheduled principal-and-interest payments repay the entire loan amount plus interest over the loan term. The balance reaching zero after the final scheduled payment is the defining characteristic of a fully amortizing loan. Why the other choices are wrong: 'The loan has negative amortization' is wrong because negative amortization occurs when payments are insufficient to cover interest, causing the loan balance to increase, not decrease to zero. 'The interest rate must be adjustable' is wrong because a fixed-rate loan can also be fully amortizing; the amortization pattern is independent of whether the rate is fixed or adjustable. 'Only interest is paid during the term' is wrong because an interest-only loan would leave the full principal balance unchanged until a balloon payment, not reach zero. Exam tip: For amortization questions, remember: 'Fully amortizing' = balance goes to zero; 'Interest-only' = balance stays flat; 'Negative amortization' = balance grows.
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