PSI Oklahoma Real Estate Practice Test

Which term best describes "Amortization"?

1. A one-time payment

2. Interest-only payments

3. Payment on a loan in regular payments of interest and principal

4. Variable payment structure

The correct answer is: Payment on a loan in regular payments of interest and principal

Amortization refers to the process of paying off a debt over time through regular payments that include both principal and interest. It is a systematic approach to repay a loan, where each payment reduces the outstanding principal amount while also covering interest incurred on the remaining balance. This structure allows borrowers to gradually pay down their debt, ultimately leading to full repayment by the end of the amortization period. In contrast, a one-time payment does not involve ongoing payment structures and is not characteristic of amortization. Interest-only payments prioritize interest without reducing the principal amount, which is again distinct from the concept of amortization that includes changing proportions of both interest and principal in each payment. A variable payment structure suggests fluctuating payment amounts over time, whereas amortization typically involves fixed payments that remain consistent throughout the loan term.