What characterizes linear amortization?

Linear amortization is characterized by making equal principal repayments each year along with interest payments that decrease over time. In this method, the overall payment decreases over the life of the loan because while the principal portion remains constant, the interest charged on the outstanding balance reduces as the principal gets paid down.

This structure allows borrowers to see a decline in their overall payment obligations as the loan progresses. For example, in the earlier years of the loan, the interest component may be high due to the higher remaining principal, leading to larger total payments initially. As the principal is paid down, the interest decreases, resulting in smaller total payments in later years.

The other options do not align with linear amortization characteristics. Consistently equal total payments each year would suggest a standard amortization schedule rather than linear. Variable payments based on interest rates suggest fluctuations in the cost of borrowing rather than the fixed principal repayment approach of linear amortization. Lastly, payments that decrease over time can relate to variable structures but not to the consistent principal repayment central to linear amortization.