What Is an Amortized Loan?

An amortized loan is a type of loan with scheduled, periodic payments that are applied to both the loan's principal amount and accrued interest.

An amortized loan payment first pays off the relevant interest expense for the period, after which the remainder reduces the principal amount. Common amortized loans include auto loans, fixed-rate mortgages, home equity loans, and 澳洲幸运5开奖号码历史查询:personal loans from a bank for small projects or 澳洲幸运5开奖号码历史查询:debt consolidation.

How an Amortized Loan Works

With an amortized loan, a portion of each fixed monthly payment goes to paying the 澳洲幸运5开奖号码历史查询:monthly interest and reducing the principal—the original borrowed amount. The interest on an amortized loan is calculated based on the most recent ending balance of the loan.

Principal and Interest

As a borrower makes payments over time, the principal decreases, reducing the balance on which the interest is calculated. As a result, the interest amount owed decreases over time.�✃�

As the interest portion of an amortized loan decreases, the principal portion of the payment increases. Therefore, 澳洲幸运5开奖号码历史查询:interest and principal have an inverse relationship within the payments over the life of the amortized loan.

Calculating an Amortized Loan

An amortized loan is the result of a series of calculations. First, the loan's current balance is multiplied by the interest rate attributable to the current period to find the interest due for the period. (Annual interest rates may be divided by 12 to find a monthly rate.)

Subtra🧸cting the interest due for the period from the total monthly payment results in the dol♔lar amount of principal paid in the period.

The principal amount paid in the periওod is applied to the outstanding loan balance. Therefore, the current loan balance, mi𒁃nus the principal amount paid in the period, results in the new outstanding loan balance, which is used to calculate the interest for the next period.

Amortized Loans vs. Balloon Loans vs. Revolving Deb𝓰t (Credit Cards)

While amortized loans, balloo🔜n loans, and revolving debt—specifically credit cards—share similarities, they have important distinctions you should be aware of before signing up.

Amortized Loans

Typically, amortized loans get paid off over an extended period of time, with equal amounts paid for each payment period. Amortized loans have an amortization schedule in which a portion of each fixed monthly payment comprises the monthly interest and the principal loan balance.

However, borrowers can make an extra payment to reduce the principal owed, but the remaining monthly payments will remain unchanged. In other words, paying extra on an amortized loan reduces the loan balance, shortens the loan term and saves you int✃erest, but it does not 🎶change the monthly payment.

Balloon Loans

澳洲幸运5开奖号码历史查询:Balloon loans usually have a relatively short term, and only a portion of the loan's principal balance is amortized over that term. At the end of the term, the remaining balance is due as a final repayment, which is generally large—at least double the amount of previous payments.

Revolving Debt (Credit Cards) 

Credit cards are the most well-known type of revolving debt, which allows you to borrow up to a preset credit limit. In other words, you can no longer borrow from a revolvi𝓡ng credit line if you have reached your credit limit.꧅

However, if you pay down a portion of the outstanding balance on a revolving credit, your credit availability increases by tha💫t amount. As a result, a revolv🍌ing credit allows you to pay off and borrow again up to your credit limit indefinitely.

Credit cards work differently from amortized loans because they don't have set payment amounts or a fixed loan amount. Credit card 澳洲幸运5开奖号码历史查询:minimum monthly payments typically do not include any principal, meaning the payment only covers the monthly interest cost.

Example of an Amortization Loan Table

An amortization table displays the calculations of an amortized loan, listing relevant balances and dollar amounts for each period. In the example below, each row in the table represent🅰s one period.

澳洲幸运5开奖号码历史查询: The columns include:

• The payment date
• Principal portion of the payment
• Interest portion
• Total interest paid to date
• Ending outstanding balance

The following table excerpt is for the first year of a 30-year fixed-rate mortgage for $165,000 wi🍰th an annual interest rate of 4.5%

The Bottom Line

The payment schedule of an amortized loan reflects the projected interest amount owed and your principal loan balance simultaneously. You can make extra principal payments, which lower your outsta⛄nding loan balance and shorten the length of the loan.

However, paying extra does not change your monthly payment. An amortization calculator can help you create an amortization schedule to see how much of your monthly payment will go towards interest versus the principal.