Loan amortization refers to how loan payments are applied to certain types of loans, like personal loans and auto loans. In most cases, your monthly payment will remain the same. It will be divided among interest charges and reduce your loan principal, or the original amount of money you borrowed. Let’s dive deeper into loan amortization and how it works.
What is loan amortization?
An amortized loan is a loan that’s spread out into a series of fixed payments and repaid at the end of the term, which can range from a few months to a few years or even longer. While some of the payments go toward the interest costs, some will be applied to loan balance. Over time, you’ll pay less in interest and more toward your balance.
How loan amortization works
If you take out an amortized loan, the amount of each payment that will go toward interest charges and principal will change over time. As you pay down your loan balance, the interest portion of your payment will decrease. This means the payment toward your balance will increase, helping you pay off your loan faster. When you get to the end of your loan term, you’ll pay very little in interest. Almost your entire payment will reduce your balance.
Types of amortized loans
There are several types of amortized loans, including:
Offered by banks, credit unions, and online lenders, personal loans usually offer fast approvals and funding. These loans are flexible, meaning you can use them to consolidate debt, cover a car repair, fund a home improvement project, or anything else.
Auto loans are designed to help you cover the cost of a new or used vehicle. These loans typically come with terms of five years or less. While longer terms are an option, they will force you to spend more on interest and put you at risk for being upside down on your loan, meaning your loan exceeds your car’s value.
Student loans are used to pay for education-related costs, like tuition, fees, books, and living expenses. You can choose from federal student loans from the government or private student loans from private lenders. The types you select will determine your interest rate, repayment options, and protections.
Home equity loans
Home equity loans can allow you to borrow against the equity in your home, or the difference between your home’s value and what you owe on your mortgage. You can typically borrow up to 85% of your home equity and receive a lump sum of money upfront to cover virtually any expense.
How to amortize a loan
If you don’t want to do the math manually, you can use an online loan calculator to amortize a loan. It will provide you with an amortization schedule so you can clearly see how much money you’ll pay in principal and interest over time. All you have to do is provide your loan amount, loan term, and interest rate.
Amortized vs. unamortized loans
An amortized loan spreads your principal payments out over the loan term. This means each monthly payment you make will be split between interest and principal. Eventually, you’ll pay less in interest and more toward your balance.
If you opt for an unamortized loan, like a credit card, home equity line of credit (HELOC), or interest-only loan, however, you’ll make interest-only payments for most of the loan term. At the end of the term, you’ll likely be required to make a final balloon payment to repay the total loan principal.
Get an Advance America loan
Advance America offers a variety of loans for borrowers with all types of credit scores. These include payday loans, installment loans, title loans, and lines of credit. You may apply online and get your money quickly, sometimes within 24 hours. Visit Advance America today to learn more about the loans we offer.