Amortization Schedule

Loan Amortization

Loan Amortization Is Not What You Think

Borrowing money through a "simple interest" loan isn't as simple as it sounds. The interest rate charged for that debt can add up thanks to the process known as loan amortization. Understanding a bit about how loan amortization works is a good idea for anyone that wants to borrow $1,000 or $500,000. Borrowing money isn't as "simple" as most people might think. Lenders have to make their money, too, and this is how they do it.

Loan amortization is nothing more than repaying debt over time when interest is in the picture. While it might seem like a $200,000 loan at 7 percent interest would only need a $14,000 pay back over time, this simply isn't the case. Lenders use loan interest rates compounded yearly. This means a loan for $100,000 can easily involve more than $200,000 in repayments over the course of 30 years as you pay interest on the interest already calculated, with payments split unevenly between the principal and the interest charges. The loan amortization chart shows the real numbers as you pay down both the interest charges and principal throughout the life of the loan.

To find out how loan amortization works for a particular loan there are great tools available. The most common is an amortization calculator. These are great to use for any loan amortization, but are most commonly available to show how money paid monthly on a home loan will actually be used for the debt service. What loan amortization schedules or charts drawn up from a calculator will show is exactly what happens with a simple interest loan over time. The first few years, for example, a loan amortization table will likely show most of the monthly payments going on interest payments. As the loan matures, more and more money will go on the principal payments until you finally pay off the loan.

The benefits of running through a loan amortization program to see how lenders use payments to service the debt are many. This tool is great for showing how effective extra principal payments can be for shortening the time involved in paying off a loan and how you can reduce total interest payments over time. The lower the principal amount, the less the compounded interest figure will be.

Loan amortization tools can also be valuable for clearly showing why good credit is good to have and why larger down payments can work to a borrower's advantage. The reality is the lower the principal amounts, the less money you will pay out over time as the loan amortization process takes place. There's more to borrowing money than principal and interest. Loan amortization tools make this clear.

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