Amortized Loan
Because it uses the word "amortized," these loans sound very snooty. Like if you were to meet someone named Chester Hamilton Festerbottom IV. You'd assume he comes from a long line of monocle salesmen. But you don't know him...he might enjoy Mr. Pibb and MMA and own a tattoo parlor down by the airport.
Same with amortized loans. They aren't snooty. They're actually very down to Earth. All the things you likely think of first when you think of loans (car loans, home loans, personal loans) typically fall under this category.
Amortized loans are just ones that are paid off in installments. The interest and principal are figured up front and then divided into regular payments.
Say you're buying a $20,000 car. You put $5,000 down and will be getting a 60-month loan for the rest of the cost, with a 5% interest rate. So $15,000 at 5% over five years. So that's $750 a year in interest (5% of $15,000) times five years (making a total of $3,750 in interest for the life of the loan). So you'll be paying the lender $18,750 total ($15,000 principal + $3,750 interest). Divide that by 60 months and you get a monthly payment of $312.50.
Often times, the loan schedules are organized so more interest is paid in the early stages of the loan, with the majority of the principal getting paid off later.
Related or Semi-related Video
Finance: What is Amortization?49 Views
Finance a la shmoop what is amortization alright come on now people
sing it with me when you repay your loan overtime on your own that's amortization [man singing serving food and dogs jump up]
doesn't everyone know that song i was raised as a kid with that at bedtime
all right well sorry about that every now and then Beyonce being Crosby has to [Beyonce on stage]
you know let out her inner self here so yeah amortization big word let's make it
smaller we've got the root word Mort in there which means death and yeah [Mort highlighted in yellow]
basically when you're amortizing alone you're killing your obligation to pay it [a knife pulled on the loan]
and softly, killing softly with his song and yes another way you're gradually reducing
your obligation by paying back the loan you know whatever you borrowed your
amortizing all right so once a loan is fully amortized the amount you owe is [loan bill due amount]
zero like you paid it all back all right well that's one definition of the term
amortization also refers to a fancy way of allocating costs like you pay a
thousand dollars for an amazing bed mattress well did you get value from it [man paying $1000 for a bed and hands cash to woman]
well if you use it a lot you'll amortize the cost in such a way that the bed on a
per night basis is cheap how so well if you sleep on it for 2,000 nights before [calculation for value of bed]
you toss it some dumpster somewhere you paid 50 cents per night for your bed got
it fifty cents times two thousand that's a grand and that's like a nickel of hour of
use if you're know sleeping 10 hours a day or using it ten hours a day and [man sleeping in vibrating bed]
that assumes it's just you in the bed all right well what about a prom dress
or a tux well the finest Walmart prom dress runs [girl holding a prom dress for $300]
about 300 dollars but you wear it once before Tyler Hendricks vomits on it and [Tyler vomits on girls prom dress]
well and you're done so it cost 300 bucks for one night or
about fifty bucks an hour for the six hours you wore it before tossing it yeah
way expensive per use because you only had six hours of amortization the dress [calculation for the value of prom dress]
well loans work the same way you borrow 120 grand to buy a home with a 30-year
mortgage over those 30 years you amortize the loan or allocate the paying [woman receiving a 30-year loan for a mortgage]
down of that 120 k you just borrowed over a long period of time so you know
something keep in mind the next time you go shopping for a bed or a dress [a couple shopping for a bed]
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