An amortized loan should be repaid in regular monthly payments. The borrower’s monthly payment is partially divided to pay off the principal and the interest rate. Another name of this loan is an installment loan which means it should be paid off in parts or installments over a certain period of time. Generally, the monthly parts are equal.
An amortization schedule is used to keep track of the repayment progress and know how much debt is left. As the borrower starts repaying the loan, its balance starts to decrease over time.
More than that, the amortization schedule shows how much the borrower pays toward the principal and how much they pay toward the interest. Firstly, the borrower repays a part of the interest and then a portion of payments go toward reducing the principal of the loan.
Amortized loans are very popular these days. They include many kinds of installment loans such as home loans, fixed-rate mortgages, car loans as well as personal loans given by traditional banks.
- The most recent balance of your loan defines the interest.
As the borrower starts repaying the debt, the interest part starts to decrease and the excess goes toward repaying the principal. As a result, the principal and the interest portions must change so that the principal part becomes bigger.
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The monthly balance of the loan equals the present loan balance minus all the principal payments for this period. This new loan balance will define the new interest rate for the upcoming repayment period. In other words, the interest and the principal have inverse relationships so that initially the borrower pays more interest and less principal until later this ratio becomes reversed.
There are also loans that are considered to be partially amortized. Thus, the borrower pays a balloon payment at the beginning or at the end of the repayment period.
Other than that, you should make the same payment installments on a monthly basis. To sum up, if a borrower takes out an amortized loan, he/she needs to make equal monthly payments.
But there is a possibility to repay the debt ahead of schedule. You can pay off more than is scheduled for this month and therefore decrease capital.