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What is an Amortized Loan
8 Apr 2019

What is an Amortized Loan and How Do They Work?

About 55% of Americans say that they have absolutely no emergency savings.

If you’re a part of this 55%, we know that dealing with a sudden large expense is an enormous amount of financial and personal stress.

You may be tempted to take on more credit card debt to get you through these tough times. However, the interest rates on credit cards — even those that offer a “grace period” with 0% interest — can be overwhelming.

And that’s assuming that you’re in good enough financial shape to get approved for a credit card in the first place.

The good news?

There are plenty of other options available to you. One such option is an amortized loan.

But what is an amortized loan? Further, is it the right fit for you?

Keep on reading this post to find out.

What Is an Amortized Loan?

Before we get into anything else, let’s first make sure you can answer the question, “What is an amortized loan?”

When you apply for a loan, you’ll be responsible for paying back the principal amount, plus the interest rate. One of the most important things that people consider when applying for a loan is the monthly payment they’ll be responsible for.

Especially if you’re on a tighter budget, you may feel nervous about a variable monthly payment — an amount that changes every month. However, you want to be able to pay off your interest quickly.

An amortized loan is the perfect solution.

The amount of money that you pay per month doesn’t actually change.

However, the structure of the payment is such that first, you’ll pay off your interest for the period, and then the rest of the payment you make goes toward the principal amount.

This means that you’ll make your interest payment to the personal loan lender while reducing your overall balance in the process.

Your interest payment starts off high when you first begin to pay back the loan, and gradually decreases with each payment. Gradually, more of your money will go towards paying off the principal, while less and less goes towards the interest payment.

A Look at Some Numbers

We understand that the debt amortization process can seem a bit complicated at first.

Let’s take a look at some numbers to help you better break things down.

First of all, let’s say that you borrowed $20,000 in total.

Every month, you make a payment of $250. That amount doesn’t change, and never will. It’s just the way the payment is applied that changes each month, and the amount of money that goes towards your principal and interest.

For example, for the first month, let’s say about $200 of that goes towards your principal payment. The remaining $50 goes towards your interest payment. Your end balance is now $19,800.

The next monthly payment, you’ll still give the lender $250 in total.

However, perhaps $205 goes towards the principal payment, with the rest of that $45 going to the interest payment.

See?

The process isn’t really that tough to understand once you’re able to look at an example.

The Benefits of Loan Amortization

There are lots of reasons why borrowers gravitate towards a loan amortization.

Let’s take a look at the top benefits now so that you can better decide if this type of loan is right for you.

Remember to apply the same scrutiny towards a lender offering an amortized loan as you would with any kind of loan type. Don’t be afraid to negotiate interest rates, and always shop around to make sure you get the best possible deal.

Finally, always keep the ultimate rule of borrowing in mind. Never borrow more than you truly need, and never borrow more than you know you can pay back within the term of the loan.

You’ll Understand the True Value of the Loan

Many people look at amortization payment calendars when they’re first deciding whether or not they should apply for a loan at all.

Why?

Because it helps them to get a much clearer picture of the true “value” of the personal loan no credit check. In other words, you can truly understand how much it “costs” to borrow money.

Everyone gets sidetracked by focusing mainly on “affordable” monthly payments. It’s normal for us to look for a loan that offers the lowest possible monthly payment.

But while that method certainly looks attractive at first? In the long, it’s often not the smartest financial decision. This is because you end up paying so much money on interest that the loan ends up costing far more than you would expect.

With amortized payments, you get a deeper understanding of just how much you’ll pay the lender who provides you with the loan. Then, you can make the smartest financial decision possible.

Tracking Payments Is Much Easier

Let’s face it: budgeting can be a challenge for even the most financially responsible people.

However, when you don’t know how much to plan for payments each month, it becomes easy to get trapped in a cycle of debt.

In fact, right now, about 20% of Americans spend anywhere from 50-100% of their monthly income on paying down their debts.

We know that’s not a situation you want to find yourself in. That’s one of the reasons why you should always look for loan payment options that offer you a fixed monthly rate.

A fixed payment makes budgeting easier. You no longer have to “guess” or deal with under-budgeting, as you would with a variable monthly payment.

The last thing you want when taking out a no credit check loan is to end up making the problem worse. When you have a monthly payment, you’ll enjoy less stress and much more control.

A Set Timeline

Finally, one of the biggest benefits of getting an amortized loan is that you’ll have a set timeline by which to pay back the loan.

The issue with credit card debt is that, for many, they’re too tempted to keep paying as little of their balance as is possible.

Often, this means that they hold onto debt for much longer than they really should. When you have an end date in sight, you’ll know exactly how to adjust your budget.

Don’t be surprised if other areas of your financial life start to improve as a result of sticking to a payment schedule.

How You Can Spend an Amortized Loan

Interestingly, there are lots of different kinds of amortized loans available to you.

Yes, there are even options for those who have credit scores that aren’t quite as strong as they’d like. In some cases, you may even be able to work with a lender that doesn’t do a full credit check.

So, what exactly can you spend the money you get from an amortized loan on?

Many people look for amortized car/auto loans. These loans usually carry a term of five years or less. To pay down your interest as quickly as you can, choose the shortest loan term possible.

Amortized loans are also often used in financing home purchases.

Finally, the most common kind of amortized loans are personal loans in general.

You can apply for these loans online, and they often have a shorter approval period. Personal loans usually have fixed interest rates, and are ideal for those who need funding for smaller projects and problems.

People may use personal loans to pay for a wedding, to cover the cost of sudden medical expenses, or even to fund a home improvement project.

One last important thing to keep in mind?

Credit card payments are not amortized. You’re usually in control of how much you pay every month. As the average household has about $16,000 in credit card debt, many suffer because of high interest rates.

Applying for the right card, or applying for a loan instead, helps you to avoid this problem.

Is an Amortized Loan the Right Choice for You?

From helping you to get a straightforward answer to the question, “What is an amortized loan?” to helping you understand the benefits amortized debt offers, we hope you’ve found this post informative.

Above all, remember to be honest with yourself about your current financial situation, as well as other upcoming expenses.

Remember that there are all kinds of different options when it comes to amortized personal loans.

We’re here to help you make certain you get the best option for you. We can help you learn more about personal loans, credit cards, and much more.

Isn’t it time you took back control of your financial future? Here are some other articles you might find helpful:

Your guide to buy now pay later electronics
The easiest payday loans to get approved for to get your finances on track
Your guide to loans based on income with no credit check
Online installment loans with monthly payments