Certified Residential Appraiser Practice Exam

What type of loan has a decreasing balance that includes interest and repayments?

1. Straight Loan

2. Amortized Loan

3. Interest-only Loan

4. Balloon Loan

The correct answer is: Amortized Loan

An amortized loan is characterized by regular payments that cover both interest and principal repayment over the term of the loan. As the borrower makes payments, the outstanding balance of the loan decreases. Each payment includes a portion that goes toward interest and a portion that reduces the principal balance, resulting in a gradual pay-down of the loan over time until it is fully paid off at the end of the term. In contrast, other types of loans have different structures that do not involve this gradual reduction of the principal in the same manner. A straight loan typically involves interest-only payments for a set period, with the principal due at the end, meaning the balance does not decrease during the loan term. An interest-only loan allows the borrower to pay only the interest for a specific period, also leaving the principal unchanged. A balloon loan involves lower initial payments, typically interest-only, with a large lump sum due at the end, which does not decrease the balance in a consistent manner over time. The unique feature of an amortized loan is the systematic and regular reduction of the principal balance, making it the correct answer in this scenario.