What can borrowers expect when their loan agreement includes a provision to use the "sum of the balances method"?

When a loan agreement includes a provision to use the "sum of the balances method," borrowers can expect that the interest paid will be skewed towards the earlier payments. This method calculates interest based on the sum of the outstanding balances over a specific period rather than strictly on the principal balance remaining at any given time. As a result, more interest is typically accrued during the early stages of the loan, leading to higher interest payments initially.

In a loan structured this way, most borrowers start by paying off the interest first, which diminishes over time as the principal is paid down. Thus, this method emphasizes the interest component in the initial payments, making the early loan payments higher in interest costs compared to later payments when the principal amount is reduced.

This characteristic explains why other options are less accurate in reflecting the implications of the sum of the balances method. For instance, equal payments throughout the life of the loan or consistent payment structures regardless of the balance are not features of this approach. Additionally, decreased overall interest expense compared to traditional methods would not be expected, as this method often results in higher initial interest costs, rather than offering a lower total interest expense.