Loan payments are typically amortized when the loan is paid back in installments over a set period of time, such as a few months or several years. Amortization is the process of paying off a loan over time through a series of regular payments that are applied toward both the principal balance and the interest that accrues on the loan.
In an amortized loan, each payment is divided between the principal and the interest owed on the loan, with more of the payment going toward the interest in the early years of the loan and more going toward the principal as the loan nears its end. This is because interest is calculated based on the remaining balance of the loan, so the interest owed is higher when the balance is larger.
The amortization schedule for a loan outlines the payment amounts, the amount of each payment that goes toward interest and principal, and the remaining balance of the loan after each payment. This schedule can be helpful for borrowers to understand how much they will owe each month and how much they will pay over the life of the loan.
Amortized loans are common for many types of loans, including mortgages, car loans, and personal loans. The specific terms of the loan, including the interest rate, payment amount, and repayment period, will depend on the type of loan and the lender's requirements.
