A loan that has planned, monthly payments that are applied to both the principal and interest accrued is known as an amortized loan.
An amortized loan payment is one that reduces the principal amount of the loan after paying off the relevant interest expense for the period.
Auto, housing, and personal bank loans for small projects or debt consolidation are examples of common amortized loans. Calculations are used to provide an amortized loan.
The interest due for the period is first calculated by multiplying the loan’s current balance by the interest rate applicable to the current period. (To calculate a monthly rate, divide an annual interest rate by 12).
The amount of principal paid for the period is calculated by deducting the interest due for the period from the total amount of monthly payments.
The principal paid during the period is deducted from the loan’s outstanding balance. The new outstanding balance of the loan is therefore calculated as the loan’s current balance less the amount of principal paid throughout the period.
The interest for the upcoming period is determined using this newly created outstanding balance.
Loans that are amortized are typically repaid over a long period of time with equal payments made during each payment period.
It is possible to pay extra, though, which would further down the principal outstanding.