What happens to the principal amount of an amortized loan over time?

In an amortized loan, the principal amount represents the original sum of money borrowed, and over the term of the loan, this amount is systematically reduced through scheduled payments. Each payment is divided into two components: interest and principal. The interest is calculated on the remaining principal, so as the borrower makes payments, the principal balance decreases.

With each payment, a portion goes toward paying off the interest owed and the rest is applied to the principal balance. This causes the principal to decrease over time, which means that a larger portion of subsequent payments will go toward reducing the principal rather than interest. This gradual reduction continues until the loan is fully paid off at the end of its term.

The other options do not accurately reflect the mechanics of amortization, where the goal is to reduce the principal amount consistently over time. Hence, the understanding that the principal decreases with each payment aligns perfectly with how amortized loans function.