When getting a loan, you might think it’s easy, but it isn’t. There are plenty of documents you need to present when you’re applying for a loan to be approved. If you’re going to loan a significant amount, that’s when you will be needing something to be amortized. Loans and amortization go hand in hand especially if you’re going to loan a huge amount. They must be amortized because of a matching principle.

What is Loan Amortization?

An amortization loan is a type of loan with scheduled periodic payments that comprises of both principal and interest. An amortized loan payment pays the related interest expense for the period before the principal is paid and reduced. This is different to loans with interest-only payment features

Usually, to amortize a loan means creating a series of equal monthly payments that will provide the lender with:

      Interest based on each month’s due principal balance

      Principal repayments that will cause the due principal balance to be zero at the end of the loan.

This is an accounting term that refers to the process of allocating the cost of an intangible asset over a period. This also refers to the resettlement of the loan. 

Examples of Loan Amortization

The most common examples of a loan amortization are listed below. These types of amortized loan usually have set payment amounts or fixed loan amount.

  • Auto Loan

  • Home Loan

  • Personal Loan

How does an Amortization Work?

When you pay off a debt over time with regular, equal payments, that’s when amortization happens. Each time you pay (generally monthly payments), a portion of the cash goes towards:

      The interest costs (What your lender gets paid for the loan), and

      Decreasing your loan balance (aka paying off the loan principal)

Getting a loan can be a daunting task. You have to understand the terms that come with loaning. Familiarizing yourself can give you a better understanding on the loans and such. If you decided to loan a huge amount, you can talk with your lender and carefully think it through before deciding to avoid getting yourself into debt.

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