Personal Loan

What Is Loan Amortization?


Asset depreciating is quite a common concept. If a person owns a certain vehicle, they would know that the value of it depreciates. As time passes, it loses its value. This asset was tangible; according to the concept of amortization, the value of intangible goods decreases with time. Under intangible assets, there can be several things like a website, a patent, or many more. To be exact, these are any asset that is not physically present. 

Amortization is also about loans. It helps borrowers to make monthly payments systematically. So, just like a tangible asset, there is an intangible asset that depreciates. These assets include investment, copyright, trademark, software, and Loan Amortization.  

What is Meant by Loan Amortization? 

A loan that is amortized needs to pay within a given period. In this repayment structure, the borrowers must pay the same amount throughout the loan tenure. The first payment portion is directed towards the interest. The next portion is directed towards the remaining loan amount. So, the total borrowed amount is a major part of the repayment amount. And a lesser part is assigned for the interest. 

Loan Amortization fixes the monthly minimum payment. But such a loan does not preclude borrowers from making any additional payments. If a person makes any extra payment, that will go towards repaying the principal amount. This would help borrowers to save total interest during the loan’s life. 

What are the Different Types of Amortizing Loans?

There are various loans under this system. It is designed so that instalment payments can be made. A fixed amount must be paid every month, which is directed towards interest and principal amounts. A few common types of loans are:

  1. Auto loan.
  2. Student loans. 
  3. Loan for home equity. 
  4. Personal loans
  5. Fixed-rate mortgage. 

What is the Difference Between an Unamortized Loan and Amortized Loan?

In loan amortization, the payment of principal is made throughout the overall time of the loan. It is profitable for the ones who are making the payment. The amount given per month gets divided into two parts. A larger part goes towards repaying the principal loan. And a lesser part goes towards interests. The person needs to pay both the interest and the principal. The monthly payments are a bit higher compared to an unamortized loan.

In the case of an unamortized loan, only the interest is paid back in the tenure of the loan. The borrowers need to make a payment known as a balloon payment. It is to be made at the end of the loan period. It needs one to make a payment of a huge sum of money. It is why the monthly payments are less. But for many, it might take a lot of work to make a balloon payment. Hence, one must plan for the payment ahead of time. To cope with this, one can make added payments during the loan. That amount would get directed towards the principal. 

Here are a few examples of unamortized loans:

  1. Interest-only loan.
  2. Credit cards.
  3. Home equity lines for credit.
  4. Mortgage loan.
  5. Few loans allow negative amortization. The payment made monthly is lesser than the interest accrued at that time. 

How Does Loan Amortization Function?

In loan amortization, the balance is broken into an equal payment schedule. It is done based on the interest rate, loan amount, and loan term. This system allows the person to know how much they are paying. They would know how much of the amount would go into interest and principal repayment. They would also know how small the amount remains after they make payment. 

A loan amortization table can help a person. 

  1. One can know how much they would save by making extra payments. 
  2. The loan payment can be reverse-engineered to know how much they can afford to finance. 
  3. One can also calculate the total interest paid annually for tax. 

How Can Someone Amortize a Loan?

The best way to amortize a loan is by using a loan calculator. It can also be calculated using template sheets available in MS Excel. There is also a formula to amortize loans manually. For this, the total loan amount would be needed. One needs to know the rate of interest. Also, the tenure and payment frequency need to be known. 

The formula is:

a / {[(1 + r) n]-1} / [r (1+r) n] = p,

The following stands for:

a: the principal amount of the loan.

r: The monthly rate of interest. (Annual rate / total payment made in the entire year)

n: The no. of payments that needs to be made in total (total no. of payments made in the entire year x length of the loan market in years)

What is Meant by an Amortization Table?

This table lists all the payments that need to be made. This table lets one know how much of the given amount goes to the principal and how much is for interest. 

What is typically included in the table?

  1. Loan details. 
  2. The frequency of payments.
  3. Total payment.
  4. Any extra payment.
  5. Principal requirement.
  6. Interest costs.
  7. Any outstanding balance. 


Loan amortization is a profitable system for borrowers. In this system, the monthly payment gets divided into two parts. One part does for interest. The other part goes for the principal amount. This lets a person avoid balloon payment, which can be quite difficult for some people. But in this system, the monthly instalment is a bit high. It is because both the principal and the interest are getting paid. Before going for any loan, it is advised to do proper market research. If someone is looking for a finance option, then “Piramal Finance” is a good personal loan/financing option for buyers.