Join thousands of students who trust us to help them ace their exams!Watch the first video
Multiple Choice
In each succeeding payment on an installment note, which of the following statements is correct?
A
Both the interest and principal portions of the payment remain the same throughout the note's life.
B
The entire payment is applied to interest until the final payment, which is applied to principal.
C
The portion of the payment applied to interest decreases, while the portion applied to principal increases.
D
The portion of the payment applied to interest increases, while the portion applied to principal decreases.
Verified step by step guidance
1
Understand the concept of an installment note: An installment note is a type of loan where the borrower makes regular payments over time. Each payment typically includes both interest and principal portions.
Recognize the structure of payments: In an installment note, the total payment amount remains constant throughout the life of the loan, but the allocation between interest and principal changes over time.
Explain the interest calculation: Interest is calculated on the remaining principal balance. As the principal balance decreases with each payment, the interest portion of the payment also decreases.
Explain the principal allocation: Since the total payment remains constant and the interest portion decreases, the portion of the payment applied to the principal increases over time.
Summarize the correct statement: The portion of the payment applied to interest decreases, while the portion applied to principal increases as the note progresses.