An amortized loan is a type of loan with scheduled, periodic payments that are applied to both the loan’s principal amount and the interest accrued. An amortized loan payment first pays off the relevant interest expense for the period, after which the remainder of the payment is put towards reducing the principal amount. As the interest portion of the payments for an amortization loan decreases, the principal portion increases. Common amortized loans include auto loans, home loans, and personal loans from a bank for small projects or debt consolidation. Amortized loans are often compared to two other types of loans; balloon and revolving debt (specifically credit cards) but each have important distinctions. As mentioned before amortized loans are paid off over an extended period of time, with equal payments throughout. However, there is always the option to pay more to reduce the amount of principal. Balloon loans are typically short term, with only a portion of the loan being amortized, with a remaining balance due as a large final payment. Credit cards (the most well-known revolving debt) are all about borrow against a limit, and there are no set payments or fixed loans. Amortized loans are also often known for their schedules, which show how the balance decreases month to month with incremental increases in principal payments and decreases in interest payments.
Used in a Sentence
Due to their scheduled periodic payments, amortized loans are often seen in paying off auto and home loans.