What Is Loan Amortization

What Is Loan Amortization



What is​ Loan Amortization?
Have you​ ever heard the​ word amortization? Most people have done it​ at​ least one time in​ the​ lives,​ as​ a​ matter of​ fact there are some people doing it​ right now,​ maybe you? Amortization means paying on​ a​ loan periodically .​
Your car payment would be an​ example or​ anything else that you​ took out a​ loan to​ purchase .​
Your home has a​ mortgage and that is​ a​ form of​ amortization,​ if​ you​ notice they both have the​ term mort in​ them and that means to​ kill .​
So in​ fact when you​ are making your loan payments you​ are killing off the​ loan.
Amortization is​ the​ whole process of​ you​ making periodical payments on​ your loan with a​ prearranged number of​ payments .​
Typically most loans are based on​ the​ same calculations,​ meaning the​ entire amount of​ your loan or​ principle,​ the​ amount of​ payments necessary to​ pay it​ off- usually monthly payments,​ and the​ interest incurred on​ the​ loan.
For example if​ you​ purchased a​ car for $20,​000 and you​ made a​ down payment of​ $5000 you​ would be left with the​ principle of​ $15,​000 .​
So your loan would have to​ be for $15,​000 and then you​ would make monthly payments for 5 years with an​ interest rate of​ 5%.
Your monthly payments would look something like this:
First you​ would divide the​ entire amount of​ the​ loan,​ $15,​000 by 60 months,​ the​ amount of​ time you​ have to​ pay it​ off .​
For this example it​ would be 60 months or​ 5 years now you​ would add the​ 5% interest rate to​ your monthly payment .​
So in​ the​ end this would calculate to​ $283.07 making monthly payments.
With any amortization loan the​ interest is​ always paid first and what is​ left of​ your monthly payment will go to​ the​ actual principle of​ the​ loan .​
To break it​ down in​ money matters,​ your first payment of​ $283.07,​ around $62.50 of​ your payment will go to​ pay interest and the​ remaining $220.57 will go towards the​ principle of​ your loan .​
So now your loan now would be at​ $14779.43 .​
As time goes on​ and you​ continue to​ make monthly payments the​ amount for interest goes down and your principle will go up .​
By the​ time you​ reach your 24th payment the​ interest on​ your repayment of​ $283.07 will be at​ $36.29 and $246.77 will be applied towards the​ principle .​
Therefore you​ can see the​ decreased interest payment,​ and the​ higher amount coming off of​ the​ actual loan.
You will be able to​ see,​ over the​ course of​ time,​ a​ dramatic change in​ the​ amounts of​ your loan in​ regards to​ paying interest and what goes towards the​ actual loan amount .​
As with any amortization loan you​ begin by paying mostly interest but over time you​ get to​ the​ actual whittling away of​ the​ loan amount that you​ initially took out.
It’s a​ good thing that you​ can find amortization calculators on​ the​ internet for free to​ help you​ balance and understand all these figures and how your amortization loan will work,​ they are very easy to​ use .​
When getting your loan many times you​ will receive a​ schedule just like the​ one we used in​ the​ example .​
Doing research with amortization calculators at​ your disposal,​ can be very helpful to​ see exactly what you​ are getting into before you​ even apply for your loan.




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