What does it mean to say a loan is fully amortized?

A loan is described as fully amortized when the structure of the repayment involves systematic payments over the life of the loan that cover both the interest and the principal. This means that each monthly payment includes a portion that goes toward paying down the loan balance (the principal) and another portion that covers the interest accrued on the remaining balance of the loan.

Over time, as the principal decreases with each payment, the interest portion of the subsequent payments also decreases. By the end of the loan term, typically several years, the borrower will have made enough payments to completely pay off the loan, so that by the time the last payment is made, the total amount owed has been satisfied.

This amortization process allows borrowers to plan their finances more effectively because they know the amount they need to pay each month, and at the end of the repayment period, they own the asset outright without any remaining debt. Other options like the loan being paid off in six months, all interest being paid upfront, or having variable interest rates do not accurately describe the concept of full amortization in loan repayment.