Amortized Loans – Full and Partial
What is an amortized loan?
An amortized loan is a loan that requires periodic payment of both interest and principal. The most commonly used amortized loan has monthly payments of a constant or fixed amount. Because each payment is calculated on the remaining loan balance, the initial payments consist mostly of interest with little applied toward principal. With each payment, the loan balance decreases so that more of the payment is applied to the principal and less to the interest.
What is a fully amortized loan?
A fully amortized loan has payments that are sufficient in size and number so that the loan balance is reduced to zero with the last payment.
What is a partially amortized loan?
A partially amortized loan is a loan where there is a balance still due at the end of the loan term. The principal amount may or may not have been paid down during the duration of the loan. A partially amortized loan is also known as a balloon loan. In a partially amortized loan, at the end of the loan term, there is a balance due that must be paid. This payment is known as a balloon payment.
Is there such a thing as negative amortization?
Yes, negative amortization can occur. Negative amortization is when the loan balance increases during the term of the loan. It can happen when the payments made are not enough to cover the interest owed on the principal balance. In turn, this will cause the principal balance to increase.
What type of interest do lenders charge on home loans?
Lenders charge simple interest on home loans. The formula to calculate simple interest on a loan is interest = principal x rate x time.
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