Borrower Gonzalez took out a loan for $100,000 at 10% payable interest per annum. Every month she pays $740 towards the loan. This is what type of note?
- installment note
- negatively amortized note
- straight note
- adjustable rate note
The answer is B. This problem requires some math before we choose an answer – even though at first glance it seems like no math is required. If a borrower takes out a $100,000 loan at a 10% interest rate, this means that the interest alone is $10,000 a year, or $10,000/12 = $833.33 a month.
Since Gonzalez is only paying $740 a month, which is less than the interest payment of $833.33, this is clearly a negatively amortized note – which, by definition, is a note where the monthly payment is less than even the interest payment.