I will provide answer to the question “what is Loan Amortization” in the subsequent paragraphs. However in order to simplify things for you, let us take it step by step.
I guess we all know what loans are hence no need to talk about it. However the main confusion is with the term amortization. Majority of people living in the US have gone for some form of loan at different stages of their lives.
Funny enough, most of these borrowers might have gone for an amortized loan without really knowing and understandably so.
Amortization is an accounting term that refers to spreading payments over a period of time usually over a year. For your information, the term Amortization can be used in two instances i.e. Amortization of Loans and amortization of assets.
However we will be focusing on the former since that is the focus of this article.
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WHAT IS LOAN AMORTIZATION?
Loan Amortization is the distribution of loan payments over a period of time in installments (usually monthly basis) as determined by an amortization calculator. Loan amortization is the coolest loan repayment model you can get.
With loan amortization, the amounts you pay as monthly installments consists of both the principal amount and interest amount. When you begin making monthly payments, a greater portion goes to settling the interest and then reduces along the line till end of the loan term.
The case is opposite when it comes to the principal; meaning that a lesser amount goes to the principal at the beginning and then increases at the end. You can manually work out your monthly payments using the formula below;
Total Payment= Loan Amount [( where I = Monthly interest rate, n is number of payments
Another way is by using the loan amortization calculator which is the easiest way of determining the periodic payment amount due on a loan.
Additionally, although a loan amortization determines the monthly payment to be made by the borrower, an amortized loan doesn’t stop a borrower from paying more is required for a month. Rather, excess payments for a period goes to pay the loan principal which in turn helps the borrower the make some savings on the total interest.
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WHAT IS AN AMORTIZATION SCHDULE?
An amortization schedule is a table that has details of each periodic payment on an amortizing loan.
Lenders or banks normally use this table or schedule to calculate monthly payments and to provide loan repayment summary for borrowers. Borrowers on the other hand uses an Amortization schedule to know how much loan they can afford, make the necessary assessments and to calculate total annual interest for tax purposes.
An amortization schedule shows you the following;
- Payment Date
WHAT ARE THE TYPES OF AMORTIZING LOANS?
- Personal loans
- Home loans/ fixed rate mortgages
- Auto loans
- Student loans