Final answer:
With the decrease of the principal balance on a loan, the interest fee each month also decreases because the interest for each period is calculated from the current principal amount. Monthly payments and the interest rate generally stay the same in a fixed-rate loan. Therefore, the correct option is 2.
Step-by-step explanation:
As the principal balance on a loan decreases after each monthly payment, the factor that will also decrease with it is the interest fee each month. The interest portion of each payment is calculated based on the remaining principal; therefore, as the principal lowers, the amount of interest calculated on that smaller balance will also be less. However, the monthly payments and the interest rate itself typically remain constant in a standard fixed-rate installment loan. The idea is that earlier in the loan term, a greater portion of each payment is interest, and as the principal is paid down, more of the payment goes toward paying off the principal. The total amount of interest paid over the life of the loan does indeed decrease, but that's a function of paying off the principal faster or refinancing, rather than the effect of monthly principal reductions on payment schedules.