Definition:
An amortized loan is a loan that is repaid in equal installments over a specified period of time. Each installment includes both principal and interest. This means that the amount of principal repaid in each installment increases over time, while the amount of interest paid decreases.
Key characteristics of amortized loans:
- Equal installments: The borrower makes equal payments on a regular basis.
- Principal and interest: Each payment includes both principal and interest.
- Amortization schedule: An amortization schedule shows the breakdown of each payment into principal and interest.
- Prepayment: Amortized loans typically allow for prepayment, which means that the borrower can pay off the loan early.
Common types of amortized loans:
- Mortgages: Home loans are typically amortized loans.
- Car loans: Car loans are often amortized loans.
- Student loans: Student loans are often amortized loans.
Why are amortized loans popular?
- Predictability: Amortized loans provide a predictable payment schedule, making it easier for borrowers to budget.
- Equity buildup: With each payment, the borrower builds equity in the asset being financed.
- Flexibility: Amortized loans often allow for prepayment, providing borrowers with flexibility.
In essence, an amortized loan is one that is repaid in equal installments over a specified period of time, making it a popular choice for many borrowers.
