Loan amortization is simply a process of paying back to lender by borrower in installments. It can be considered similar to installment loans. Total principal loan amount and calculated interest is divided into monthly installments which are supposed to be paid within fixed time period. Thus it is completely different from regular payday loans
in which borrower is supposed to return loan amount plus interest amount in on payment and that too before net salary day. It reduces payment risks for both lender and borrower as installments are according to borrower’s comfort table.
In amortization plan, borrower keeps on paying regular payments till whole loan amount is paid back. With every installment, a small chunk of principal amount and monthly interest is paid to lender. Thus, with every month repayment pressure on the borrower keeps on decreasing.
Loan Amortization Benefits – Payday loans
How Loan Amortization is helpful
Because of division of principal amount into small portions, this scheme can be opted when you are planning to make big spending. For example: – If you want to buy a new home or new vehicle, it is obvious that you will need big amount. You would not be able to pay back this amount to lender in one payment. If you are applying for such service for the first time, then let me tell you that you can make scheduled payments of wholesome including principal amount and interest rate over a fixed time period.
There are three terms which are considered in this installment based service: - the loan amount, loan length and interest rate according to loan length and principal amount.
Calculating Amortized Loan
Following steps are followed if you want to calculate amortized loan on your own: -
1. Determine Loan Amount
Let us consider that you are borrowing loan for buying new home. You may need to spend at least $150,000. And if you want to buy vehicle then you need at least $30,000.
2. Determine Loan Term
Loan term is determined by loan length. Loan term is 30 years for home loan whereas it is 3 to 6 years for auto loans. However, one should be clear that payment is always does on monthly basis not yearly.
3. Determine Interest Rate.
Interest rate is usually the cost implied on borrowing loan according to its loan length. It is determined on the basis of many factors like principal amount; down payment made by the borrower, and sometimes credit history if lender wants to consider it. If you have not selected fixed interest rate then you may face some problems because adjustable interest rates keep on changing.
For home loans, it is generally set to 4.5% and for auto loans it is fixed as 5.25%.
4. Calculate Monthly Payment
To calculate monthly installment payment amount, multiply the rate by one plus total number of payments, divide multiplied amount by one plus rate to the power of the total number of payments subtracted by one, and multiply the total dividend by the principal amount.
• Principal Amount: $150,000
• Loan term:30 years
• Annual Interest Rate: 4.5%
• Monthly payment: $842.30
It is very necessary to pay back monthly payments on time in order to maintain good terms with lender which directly boost up your credit history.
Moreover, mortgage loan interests can be reduced on tax basis. Talk to your lender about it or consult income tax officer to know if you qualify for it.
“Loan amortization is best when you are planning to make big spending. It will divide your one time repayment pressure into small monthly installments.”