About Loan Amortization

You may face difficult times in any moment, and chances are that they come unexpectedly. That’s why more people today get loans for financial relief, to consolidate bills, pay for education, make home improvement or purchase a new car…

Before taking a loan, it may raise a variety of questions which would keep you upset, for instance, if applying for a loan is a good idea to me, whether I am able to repay the loan, or what is loan amortization and how to calculate it – exactly what we are going to talk in this article!

No matter you are a current borrower, or a future loan-seeker, you must be familiar with the phrase – loan amortization.

Simply speaking, amortizing a loan means the process of paying down the principal of the loan in installments over the life of the loan, according to the amortization schedule. The amortized payments are usually in the same amount over a given period of time. Different from a loan where the borrower should make one-time full payment by the due date, an amortizing loan allows the borrower to settle the debt over a pre-defined term by making regular payments monthly, bi-weekly, or even quarterly.

Usually, the repayment you make periodically will cover a portion of the loan principal, plus an amount of interest. While the repayment amount for principles is fixed, the interest amount may not be. For instance, a personal loan usually takes a fixed interest rate, which means the amount repaid each month towards interest is the equal throughout the entire loan term. However, for a mortgage loan, the interest rate is usually variable, which results in the significant change to the repayment amount you actually generate.

The contrast to loan amortization is a bullet loan, where the outstanding principal, sometimes including the interest, should be paid off by the final maturity date, instead of periodic payments over the loan’s term. The typical example of bullet loans is the interest-only mortgage.

The major advantage of loan amortization goes to the lender is – lower credit risk.

It is quite simple to understand. If a borrower defaults on the loan, that would not cause much loss to the lender, as the lender will already have the entire amount repaid. This is in contrast to an all-or-nothing loan which requires a single repayment. The decrease of outstanding balance during the loan term also indicates the lender in a fixed-rate loan bearing a weakening risk related to the interest rate, for if the interest rate changes, less danger the lender will obtain.

While computing the periodic payments, loan amortization calculator and amortization schedule apply.

The amortization calculator is employed to determine the amount of regular payments made periodically. Currently, there is a wide source online to help people calculate amortization conveniently and quickly. By entering the loan principle, the term, and the current annual interest rate, the online calculator will output automatically the figures of monthly payments. By changing the interest rate and the term, you will see the differences on the amount and choose the best rate that fits comfortably into your budget.

The result the amortization calculator generates is known as amortization schedule. It is a table which details each periodic payment throughout the life of the loan in chronological order. Besides the figures of amortized payments, the amortization schedule also reveals the remaining loan principle on each due date.

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What’s Loan Amortization & Why You Amortize

Today, people are more inclined to turn to banks or financial institutions for loans to finance emergencies and keep their peace of mind. Then an in-depth understanding about loan amortization and how it works will enable you to save on the loan.