How does the amortization of a loan affect principal repayment?

The correct choice reflects the structure of amortization in loans. During the amortization process, the borrower makes regular payments, which typically cover both interest and principal. Initially, a larger portion of each payment is allocated to interest, especially in the earlier stages of the loan. However, over time, as the outstanding balance of the loan decreases, the portion of the payment that goes towards principal repayment increases.

This means that while the total payment amount remains generally constant in a fully amortizing loan, the breakdown between interest and principal shifts over time. Consequently, the principal repayment indeed decreases in relation to the total outstanding balance of the loan as time goes on, meaning that total interest payments are higher in the early years and decrease over the life of the loan.

Other options present inaccurate concepts regarding how principal repayment functions within the amortization framework. For instance, principal repayment only at the end would suggest it's a bullet loan, which is not typical for amortizing loans. Arguing that principal repayment decreases over time inherently aligns with the characteristics of amortization. Saying that principal remains constant does not capture the changes in loan balance throughout its duration. Meanwhile, asserting that repayment is solely in the form of interest neglects the principal component that is foundational to amortized loans