What type of loan involves the borrower making equal payments that include both principal and interest?

A fixed-rate loan is structured so that the borrower makes equal monthly payments throughout the life of the loan, which include both principal and interest. This means that the total payment amount remains constant, providing predictability and stability in the borrower’s budget. As payments are made, a portion goes towards reducing the principal balance and another portion covers the interest accrued on the loan. This amortization process ultimately leads to the full repayment of the loan by the end of its term.

Other loan types, such as conventional loans, can encompass various terms and structures, and while they may also use equal payments, they are not defined specifically by this feature. Partially amortized loans typically require a lump sum payment at the end of the term, meaning not all of the principal is paid off through the regular payments. Adjustable-rate loans have varying payments over time because their interest rates can change based on market conditions, affecting the total amount paid monthly. Therefore, the key characteristic of equal payments that include both principal and interest defines the fixed-rate loan distinctly.