What type of loan requires that both principal and interest be paid periodically?

What type of loan requires that both principal and interest be paid periodically?

• A. Bullet loan
• B. Self-amortizing loan
• C. Debentured loan
• D. Short-term loan

Answer: (B)

A self-amortizing loan requires that both principal and interest payments are made periodically throughout the life of the loan. This means that each payment partially pays down the principal while also covering the interest accrued during that period. This structure ensures that the loan is fully paid off by the end of its term, preventing any balloon payment at maturity. In contrast, a bullet loan typically requires only interest payments during the term, with the entire principal amount due at maturity, resulting in a lump-sum payment at that time. A debentured loan is a type of long-term security that is not backed by physical assets or collateral but does not specify how payments are structured in relation to principal and interest. Short-term loans usually imply a shorter duration for repayment but do not inherently require periodic payments of both principal and interest like a self-amortizing loan does.

A self-amortizing loan requires that both principal and interest payments are made periodically throughout the life of the loan. This means that each payment partially pays down the principal while also covering the interest accrued during that period. This structure ensures that the loan is fully paid off by the end of its term, preventing any balloon payment at maturity.

In contrast, a bullet loan typically requires only interest payments during the term, with the entire principal amount due at maturity, resulting in a lump-sum payment at that time. A debentured loan is a type of long-term security that is not backed by physical assets or collateral but does not specify how payments are structured in relation to principal and interest. Short-term loans usually imply a shorter duration for repayment but do not inherently require periodic payments of both principal and interest like a self-amortizing loan does.