An Easy Guide to Loan Amortization
Loan amortization is just a concise way of saying how much and how fast a loan is repaid. A loan amortization schedule allows the borrower to track the amount owed over the life of the loan.
The four types of amortization programs are full amortization, partial amortization, interest only amortization, and negative amortization. Full amortization is by far the lender’s choice of amortization methods. Lenders provide loan amortizations schedules when a borrower purchases a house or a vehicle. For a full amortization fixed rate loan, the interest rate remains the same over the life of the loan so the borrower pays the same amount each month. Each monthly payment will consist of principal and interest. For example, the first four payments of a $100,000 loan at a 7% fixed rate paid back over 30 years (360 months) starting in September 2008 will look like this:
Principal Interest Balance
Sep: $ 81.97 $ 583.33 $ 99918.03
Oct: $ 82.45 $ 582.86 $ 99835.58
Nov: $ 82.93 $ 582.37 $ 99752.66
Dec: $ 83.41 $ 581.89 $ 99669.24
As you can see, the lion’s share of each payment is first applied to interest with only a small amount to principal. At the end of the loan, the principal balance will be zero and the $100,000 fully paid back. Home loan amortizations schedules are an easy way to keep track of the outstanding principal loan balance.
Fixed rate car loan amortizations are calculated exactly like fixed rate home loan amortizations. But because so much of the payment is applied to interest and so little pays off the loan principal in the first year of the loan, the borrower can quickly be upside down in the loan, with the amount owed greater than the vehicle’s worth.
Commercial loan amortizations provide the same payment information for purchasers of multi-family properties, apartment buildings, motels, and other non-traditional properties. Unlike home loans which can be amortized over 30, 35 or even 40 years, commercial loans are usually amortized over 20 – 25 years. However, the loan term is either 5 or 10 years, and the loan principal will not be fully paid off. The borrower will either have to pay off the remaining principal balance or secure a new commercial loan.
The second amortization method, partial amortization, is designed to reduce the loan amount but not enough to fully repay the loan. The borrower will have an outstanding balance at the loan’s end that must either be repaid or refinanced with a new loan.
Interest only amortization is just thatthe monthly payment of only interest. No principal is ever paid back, and at the end of the loan, the borrower will owe the full amount that was initially borrowed.
The last amortization method, negative amortization, allows the borrower to have the smallest monthly payment of all the methods. But because the interest payment is so low, interest is added on to the outstanding loan balance each month so that the loan amount actually increases at the loan’s end.
If you’re shopping for a loan, use the online free loan amortizations calculators that are readily available to calculate your monthly payment. Just go online, type in “free loan amortization” and take your pick from a number of free amortization calculator websites. You’ll be able to vary the loan amount, interest rate, term in months or years, and the loan start date to determine which loan combination is best for you.