Loan Amortization

Loan - Loan Amortization

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Amortization is the repayment of a loan. It is normally used in conjunction with a time frame. For example, a 30 year loan term amortizes over a 30 year time frame.

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Loan

The longer the term is for a loan the slower it amortizes. This slower amortization means a lower monthly payment. It can also mean more interest paid out over the life of the loan.

A typical loan cost involves two components:

part of it is the interest payment,

and part of it paying off the principal

A constant cost on a 30 year fixed loan term amortizes each month over a period of 360 months. This is general amortization.

Amortization can also work in reverse. Minimum cost choice loans, such as "1% loans" that you see advertised can give a borrower the choice to pay less than an interest-only cost (the "minimum payment"). An interest-only cost keeps a loan the exact same size. It is not being paid off. Ever penny over the interest-only level is used to pay off the principal. If you pay less than the interest-only level, then you are de facto adding to the size of the loan. An increase in loan size is known as "negative amortization".

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