Question

Why do customers save money if they pay off a closed ended loan faster than the amortization table requires?

Group of answer choices

A. Customers can renegotiate the terms of the loan any time.

B. It does not since the terms of the loan are defined in the table.

C. Paying more of the principal reduces the amount of interest due.

D. A closed ended loan has standard payments that include the principal.

Answer 1

C. Paying more of the principal reduces the amount of interest due.

Step-by-step explanation:

In amortization payments, priority is given to interest payments. Lenders dedicate a high percentage of monthly repayment to interest in the first years of amortization. Since interest is based on the loan balances, the interest payments will be high if the principal amount remains high.

If a customer makes extra payments that reduce the principal amounts, the interest due will automatically reduce. Paying-off a loan early that the amortization schedule will therefore save a customer on interest payments.