Future Business Leaders of America (FBLA) Business Calculations Practice Test

When making installment payments, what is typically affected by the loan’s balance and interest rate?

1. The payment amount

2. The total payment amount

3. Neither the balance nor the interest rate

4. Only the remaining balance

The correct answer is: The total payment amount

When making installment payments, the total payment amount is influenced by both the loan’s balance and the interest rate. The loan's balance reflects the principal amount that remains unpaid, while the interest rate determines how much additional cost is incurred over the life of the loan. As the balance decreases with each payment, the amount of interest applied to the balance also changes, which can affect the overall total payment amount over the course of the loan. For example, a higher interest rate means that a larger portion of each payment goes toward interest rather than reducing the principal, which can make the total payments over the life of the loan significantly higher. Conversely, a lower interest rate can reduce the total payment amount because less interest accrues over time. Thus, the interplay between the balance remaining on the loan and the interest rate is critical in determining how much the borrower will pay in total across all installments.