Final answer:
Constant payment to principal amortization is the most commonly used type of amortization for mortgages and car loans. Each payment remains the same, but the portion going towards the principal and interest changes over time. It provides a predictable repayment schedule.
Step-by-step explanation:
The type of amortization that is most commonly used in the real world for mortgages and car loans is Constant payment to principal amortization. This type of amortization ensures that the principal and interest payments remain constant throughout the loan term. With each payment, a portion goes towards the principal and a portion goes towards the interest. As the loan progresses, the portion going towards the principal increases and the portion going towards the interest decreases.
For example, let's say you have a car loan with a principal amount of $20,000 and an interest rate of 6% per year. The loan term is 5 years. With constant payment to principal amortization, your monthly payments will remain the same each month, but the proportion of principal and interest within the payment will change over time. At the beginning, most of your payment will go towards paying off the interest, but as the loan progresses, more of the payment will go towards paying off the principal until the loan is fully repaid.
This type of amortization is preferred because it allows borrowers to have a predictable repayment schedule and ensures that a significant amount of principal is paid off over time.