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    What Is Amortization and How Does Amortization Affect You?

    Despite the complexity of its name, amortization is actually fairly simple. It refers to the process of paying off debts – whether these are mortgages or auto loans – in equal installments over a period of time.

    With each loan repayment, the amortization loan will pay off a portion of the borrowed amount plus some of the interest. 

    But exactly how can amortization help you when considering taking out a home loan, auto loan or personal loan? Read on to find out.

    What is an Amortization Schedule?

    When loans are taken out, they are accompanied by an amortization schedule, which describes how and when the loan will be paid off.

    It also outlines when the loans should be paid off.

    The document will differentiate between which payments will cover the actual loan and which will cover the interest on the loan.

    This document is useful for borrowers because it helps you see how much you need to pay back, by when, and how much interest is being charged.

    This can be beneficial, as repayment terms often increase towards the end of the borrowing period.

    So, borrowers can prepare for this and understand why there may be fluctuations in how much you expected to pay back.

    What are Amortization Loans?

    There are many different kinds of loans that can be considered amortization loans.

    Mainly, they enable people to purchase things – such as a home or car – with money they borrow and commit to paying back. In most cases, you would have been unable to make the purchase without the amortization loans.

    -Home Loans:

    Very few people buy a house in cash; most take out a special kind of amortization loan – a mortgage.

    Mortgages are highly competitive and dazzle borrowers with different repayment terms, rates, and interest. Many potential homeowners agonize over the decision between a fixed-rate mortgage and a variable-rate mortgage.

    Mortgages are renowned for a large amount of interest but are unavoidable for most people purchasing property.

    -Auto Loans:

    Buying a car in cash is more common, but usually occurs for preowned cars that have already raHow Do You Calculate Amortization?cked up the mileage.

    To purchase a vehicle that is relatively or entirely new, many people take out an auto loan to cover part of the cost. This is also an amortization loan.

    The terms for auto loans are shorter – some want the repayment made in 12 months, others will allow 84 months. One more thing to remember is that auto loans typically have lower interest rates than home loans.

    -Personal Loans:

    Personal loans are also considered to be amortization loans.

    There are many reasons someone may want to take out a personal loan. Some do so for a business venture, others to renovate their home, others to consolidate debts, and yet others to pay medical bills.

    Sometimes, personal loans have lower interest rates than credit cards, so they can be an option for those who know they will be able to commit to the repayment terms and would rather not amass credit card debt.

    How Do You Calculate Amortization?

    Amortization calculations allow borrowers to understand whether they can actually make the monthly repayments or not.

    The figures will give you the payment amount per month. This takes into account the amount borrowed, the time span of the loan, the number of repayment intervals, and the nominal interest rate.

    The following formula is helpful in finding out the payment amount:

    A = P {[r(1+r)n]/[(1+r)n-1]}


    • A- is the payment amount per period,
    • P- is the amount borrowed initially,
    • r- is the interest rate per period 
    • n- is the number of periods in the repayment. 

    This formula enables you to determine how much you would be expected to pay each period/month

    Amortization is simple and can help people purchase things upfront, allowing for payments through installments.

    Many people benefit from amortization as a viable way to afford something you wouldn’t be able to out of pocket.

    There are countless providers of these kinds of loans, so being able to calculate amortization could help you decide which provider presents the best deal for taking out an amortization loan.