Definition of Amortized loan:
An amortized loan is a type of loan with scheduled, periodic payments that are applied to both the loan's principal amount and the interest accrued. An amortized loan payment first pays off the relevant interest expense for the period, after which the remainder of the payment is put toward reducing the principal amount. Common amortized loans include auto loans, home loans, and personal loans from a bank for small projects or debt consolidation.
The interest on an amortized loan is calculated based on the most recent ending balance of the loan; the interest amount owed decreases as payments are made. This is because any payment in excess of the interest amount reduces the principal, which in turn, reduces the balance on which the interest is calculated. As the interest portion of an amortized loan decreases, the principal portion of the payment increases. Therefore, interest and principal have an inverse relationship within the payments over the life of the amortized loan.
Installment loan in which the monthly payments are applied first toward reducing the interest balance, and any remaining sum towards the principal balance. As the loan is paid off, a progressively larger portion of the payments goes toward principal and a progressively smaller portion towards the interest. Also called amortizing loan.
How to use Amortized loan in a sentence?
- I needed to get an amortized loan , so I went to my friend, who worked at a bank, and asked him how it worked.
- Many home loans are examples of amortized loan s which consist of scheduled payments which can have terms anywhere from 15-30 years and it initially works by decreasing the interest and then later decreasing the principal or the original amount taken out to purchase the home.
- You may want to take on an amortized loan if you really need some cash now and know you can pay it back.
Meaning of Amortized loan & Amortized loan Definition