Travis borrowed $10,000 four years ago at an annual interest rate of 7 percent. The loan term is six years. Since he borrowed the money, Travis has been making annual payments of $700 to the bank. What type of loan does he have? One of these is the answer: (A) Interest-only (B) Pure discount (C) Compound (D) Amortized (E) Complex

Business · College · Mon Jan 18 2021

Answered on

Travis's loan appears to be an (D)amortized loan. Here's why:

  • He borrowed $10,000 at an annual interest rate of 7 percent.
  • The loan term is six years.
  • He's been making annual payments of $700 to the bank.

In an amortized loan, each payment typically covers both the interest on the outstanding balance and a portion of the principal. Over time, with each payment, the proportion of the payment going towards the principal increases while the interest portion decreases. In Travis's case, his annual payments of $700 over six years are likely structured to cover both interest and principal, gradually reducing the loan balance until it's fully paid off at the end of the term.






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