Final answer:
Martie's auto loan payments will gradually shift so that more of the payment is applied to the principal and less to the interest over time, a result of the loan's amortization schedule.
Step-by-step explanation:
Over time, as Martie makes payments on her auto loan, the portion of her payment that goes towards the principal will increase, while the portion that goes towards interest will decrease. Initially, a larger portion of the monthly payment is consumed by interest due to the higher outstanding balance. As she continues to make payments, the outstanding balance of the loan decreases; thus, the amount of interest accrued each month is reduced. Consequently, more of her $500 payment is applied to the principal amount.
This happens because most auto loans use amortization, a system where each payment covers the interest expense for the period, with the remainder reducing the principal balance on the loan. Therefore, the correct answer is B) Principal increases, interest decreases.