If you’re unemployed, some part-time work can reduce what benefits you collect.
Amortizing loan is a money term you need to understand. Here’s what it means.
What is an amortizing loan?
An amortizing loan is a type of debt that requires regular monthly payments. Each month, a portion of the payment goes toward the loan’s principal and part of it goes toward interest.
Also known as an installment loan, fully amortized loans have equal monthly payments. Partially amortized loans also have payment installments, but either at the beginning or at the end of the loan, a balloon payment is made.
Over time, the balance of an amortized loan decreases. A borrower can monitor the progress of paying off his or her loan’s balance by using an amortization schedule.
An amortization schedule is also a helpful visual representation that depicts exactly how much of each month’s payment goes toward interest and how much is applied to principal reduction.
Before any regular monthly payment is applied to reducing the loan’s principal, the borrower must first pay a portion of the interest owed on the loan.
To calculate the amount of interest owed, the lender will take the current loan balance and multiple it by the applicable interest rate. Then, the lender subtracts the amount of interest owed from the monthly payment to determine how much of the payment goes toward principal.
As the balance of the loan decreases, the portion of your payment that is applied to interest payment also decreases, while the amount that pays down the loan’s principal increases.
Interest-only loans, loans with a balloon payment, and loans that permit negative amortization are not amortizing loans.
Amortizing loan example
Hal and Barb borrowed $100,000 to buy a condominium in a suburb of Cleveland. They got an amortizing loan with an interest rate of 5 percent.
In the first month of the loan, the part of the payment that was applied to loan principal was $120.15, while the amount applied to interest was $416.67.
By month 12, the payment portion that was going toward paying off principal was $125.78, while the amount applied to interest had fallen to $411.04.
Do you have an amortizing loan? Monitor your amortization with an amortization schedule.
More From Bankrate
4 min read Apr 18, 2022
Having a criminal record can affect your housing, finances and employment.7 min read Mar 23, 2022
The personal loan rates for March 16, 2022, have stayed the same since last week.5 min read Mar 17, 2022
Four key things influence the price tag of a new tile floor.4 min read Mar 08, 2022
This fee may be charged upfront or rolled into your loan.2 min read Feb 26, 2022
Find out how a key foreign interest rate impacts the interest you pay in the U.S.5 min read Feb 17, 2022
A recourse loan determines which assets a creditor can seize if you default.3 min read Feb 16, 2022
Figure out whether a Chapter 9 bankruptcy will affect you and how you can prepare.4 min read Feb 16, 2022
Chapter 13 lets you use your income to repay some of your debts.5 min read Feb 11, 2022