Question

How is the principal amount of an interest-only loan repaid?

a. The principal is repaid in equal increments and included in each loan payment.
b. The principal is repaid in increasing increments through regular monthly payments.
c. the principal is repaid in equal annual payments.
d. The principal is forgiven over the loan period so does not have to be repaid?
e. The principal is repaid in a lump sum at the end of the loan period.

Answer 1

In an interest-only loan, the principal is repaid as a lump sum at the end of the loan period, rather than through regular payments during the term. The correct option is e.

Step-by-step explanation:

The principal amount of an interest-only loan is repaid in a different manner than a traditional amortizing loan. Unlike a loan where each payment includes both interest and principal, an interest-only loan requires that only the interest be paid during the loan term. The principal remains unchanged. When the loan period ends, the principal must be repaid in full.

Therefore, the principal is repaid as a lump sum at the end of the loan period. This is typically done in one of two ways: refinancing the loan or using funds set aside for this purpose. It is important for borrowers to plan how they will repay the principal amount, as the entire sum becomes due at once.

Hence, Option e is correct.