What Is Amortization?

Written by: CashAdvice Staff

What is amortization? The word may sound complicated but all it means is paying a balance down over a set period of time. With amortization, the loan is spread out in fixed payments. Each payment goes to the company, interest, and the loan principal. There are different types of amortization loans. With all the loans out there it can be difficult to discern if your loan is an amortization loan or not. Some loans can help you get a house or a car. There are even loans that will help you start a business or pay off your debt. You know your loan is an amortization loan if it is an installment loan. Car loans, home loans, and personal loans are all examples of amortization loans.

Auto Loans

With an auto loan, you pay a monthly payment for a certain period of time. Auto loans are usually short loans. You can get an auto anywhere from 5 years or less. You can get an auto loan for a longer period of time but the loan may end up exceeding the value of your car. You can go to the same car dealer and trade-in your car but then the loan will start over. So if you have three years left on your car and you trade it in for another one then the loan basically starts over.

Personal Loans

A personal loan is something you can get from your credit union, a bank or a lender. Be careful if you decide to use a lender that is not your bank or credit union. You should make sure the lender is reputable and that they aren’t trying to take advantage of you. Usually these loans are amortized because they have fixed terms and fixed interest rates and fixed monthly payments.

Home Loans
A home loan is one of the most well-known amortization loans. Typically a home loan is for 15 to 30 years. You pay on this loan monthly for as long as you live in the house. Or until you sell the house or pay it off. Paying off this loan is an amazing achievement that takes a lot of dedication and discipline. It’s is rare for someone to pay off their home because most people move before they get to the end of the loan. With this loan it is common for at some point the interest rate to change or the monthly payment to change especially if you refinance your loan. Also during the time of your loan, it may be transferred to a different company. This can happy a few times during the life of the loan.

Not all loans are amortized These loans include credit card and balloon loans.

Credit Cards
Credit cards are not amortized because you can change how much you pay on the loan each month. You can also borrow on the card whenever you want. Credit cards can be good if you use them sparingly and don’t borrow more than you can pay back. There is a monthly minimum payment that you have to pay. You can pay the minimum payment or a little more. It’s best to pay the card down as often as you can. This will keep your credit rating up.

Balloon Loans
Balloon loans are not amortized because you make a principal payment at the end of the loan period. You make small monthly payments during the loan but a large sum is due at the end.

An amortization table can help you keep track of what you owe and where the money goes. In an amortization table, you can see the monthly payment due for the loan. Then it shows you how much of the monthly payment goes to the interest and to the principal. The table contains the following information: scheduled payments, principal, and interest expenses. Your scheduled payments are what you pay each month on the loan. You can calculate the interest that is paid every month by multiplying the remaining balance by your interest rate. Once the interest payment is taken out what you have left goes to your principal. While the balance goes down the monthly payment stays the same. Having an amortization table you can keep track of what your loan. You can see what you owe and how long it will take you to pay it off. It’s a good thing to have especially if you want to try to pay the loan off early. It helps because it gives you an understanding of how the loan process works. You can use the table to compare lenders, interest rates, and the best time period to choose from. When some people are getting their first loan think that when they make a monthly payment they are paying off the loan. An amortization table shows you how each monthly payment is split up and where it goes.

The loan’s monthly payment takes into account the loan amount, interest rate, and the length of the loan. A low-interest rate may lower your monthly payment. While some people may think that having a longer time period to pay the loan is a good thing because it lowers your monthly payment. While it does lower your monthly payment you will be paying a lot of interest. So while the payment is lower you are actually paying more.

Amortization loans can help you when you are struggling or they can help you afford things that otherwise you wouldn’t be able to purchase, like a home or a car. Just like with all loans make sure you read the fine print. And make an amortization table so you can see the facts of the loans in front of you.


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