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 Bond Amortization?7 Views
Finance a la shmoop what is bond amortization? okay fancy term easy
concept the basic idea is that you have to "revalue" what a bond is
actually worth each period which usually means twice a year because bonds pay [Monthly calendar appears]
interest on the you know semester system yeah twice a year so let's say you've
paid seven hundred bucks for a bond with a 5% coupon which comes due for a
thousand bucks in ten years over that time you'll have received two things the
5% per year interest from the bond in cash paid along the way and the [5% interest per year appears]
appreciation of the 700 bucks to become the thousand dollar par value at which
point it will eventually pay back its principal so to amortize the $300 of
appreciation of that bond over ten years while you could attribute 30 bucks a
year in appreciation each year such that after we'll say three and a half years
you'd hold the bond as having appreciated 3.5 times 30 bucks or $105 [Straight line appreciation formula appears]
in appreciation making the bond worth at that point in time eight hundred five
dollars oh yeah fancy but also pretty easy
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