If you have purchased a car or a house, you may already know what amortization is. Amortization is the process of spreading a loan into a series of fixed payments. By the end of the payment period, the loan is paid off. This method is most commonly used for home loans, auto loans, and personal loans.
What is amortization?
Amortization is the method by which some loans get paid. Typically, The monthly payments of the loan are spread out over a series of months or years, and they remain the same. The payment is divided between the interest costs, the loan balance, and other expenses, including property taxes.
Even though your payments will always be the same, you will pay the loan’s interest before paying the principal. As time goes on, you will pay less interest, and more of your payment will go to the principal balance.
The most typical amortized loans are auto loans, home loans, and personal loans. Auto loans tend to have a 5 to 7 year loan period. The longer your auto loan, the more likely you will be upside down in your payments, meaning your loan will exceed your car’s resell value. Home loans are usually 15-year or 30-year fixed-rate mortgages. Most people do not keep their homes for 15 or 30 years. Instead, they sell or refinance, but these loans operate as if you were going to keep the house for the entire time. Finally, personal loans often have a three-year term, and they’re usually used for small projects or debt consolidation.
If you’re considering financing a house or car, you are likely to have an amortized loan. These loans are great for understanding how borrowing works. With an amortized loan, you will know exactly what you’re paying every single month, but you have to be careful because the lower monthly payment can sometimes mean you’re paying more interest in the long run.