What does an installment payment typically include?

An installment payment typically includes both principal and interest, which are the foundational components of most loan repayment structures. The principal represents the amount borrowed, while the interest is the cost of borrowing that amount over time.

In a standard loan arrangement, each installment made by the borrower is applied partially to reduce the principal amount and partially to cover the interest owed for the period during which the loan is outstanding. This ensures that as the borrower makes payments over time, they are gradually reducing their debt while also compensating the lender for the risk and cost of providing the loan.

Other options focused on singular components or different elements of payment. For instance, payments that only include interest would not reduce the amount borrowed and would not be sustainable in a long-term loan scenario. Similarly, while fees and taxes may be associated with a mortgage, they are not included in the basic loan installment structure that focuses specifically on the repayment of principal and interest.