What is an Amortized Loan?

Amortized loan debt requires monthly payments over a set period, in which a portion of the monthly payment goes toward the loans principal and the rest goes toward interest.

Back to: BANKING, LENDING, & CREDIT INDUSTRY

How Does an Amortized Loan Work?

Amortized loan payments process periodically over a set period, paying the corresponding interest before regular payment and capital reduction. Typical amortized loans include car loans, mortgages, personal bank loans and debt consolidation.

The relationship between capital and interest

The final loan balance determines interest, thus, as payments over the interest amount stack, the interest calculated for future payments lowers. Conversely, payments increase as the proportion of amortized loans decrease. 

Calculation 

To calculate depreciating loans, first calculate the monthly interest rate by dividing the annual interest rate by 12. Multiply the current loan balance by the monthly interest rate, and subtract the product from the monthly loan payment. The difference calculated is the dollar capital paid for that period. Subtract the capital paid from the current loan balance for a new outstanding balance, and use the new outstanding balance for the next periods interest rate. 

Amortized Table 

A depreciation table displays the calculation of amortized loans, including balance and dollar amount. The rows of the table represent each period, while the columns represent current loan balance, total monthly payment, payment percentage, primary payment amount and final unpaid balance respectfully.