Paydayloanskentucky.org – When loan payments are amortized, you might notice a big difference in how the system works. Someone who used to take loans for short periods of time might find the amortization schedule to be quite unusual.
However, as interesting as it is, it has its own pros and cons. That’s why, in this post, we want to cover this topic. The purpose is to help our readers choosing the best loan for them.
What is Loan Amortization?
Loan amortization is basically a payment system in which the lenders and the debtors agree to spread out the loan into a series of fixed payments. The debtors will end up paying the same amount of money each month.
The fixed payment is not the result of constant principal and interests. In fact, if you look at its calendar, you will notice that the interest expenses are very high at first, while the principals go higher at the same time.
The purpose of amortization is to help the debtors understand what portion of each payment goes to both interest and principal.
Example of When Loan Payments are Amortized
Say, you obtain a N700,000 loan from a bank to buy a car. The repayment period is 5 years. During the first payment, you will see that the interest rate is very high while the principal is very low. However, as time goes by, the interest expenses keep decreasing while the principals keep increasing.
Amortized debts are totally different compared to other types of debt, such as balloon loans. With balloon loans, you pay a fixed amount of money during the repayment period except at the end, which requires you to pay a large sum of money. Hence the name “balloon” for it.
When Loan Payments are Amortized Calendar
To understand a loan amortization better, it’s easier to just look at the calendar.
|Monts||BALANCE (START)||PAYMENT||PRINCIPAL||INTEREST||BALANCE (END)|
|...||. . . .||...||. . . .||. . . .||. . . .|
The balance is basically the amount of money you still owe. The end balance is your balance minus the principal. The payments from month 1 to month 60 are constant, but the principal and interest are not.
How to Calculate Loans Amortization?
We can calculate the debt amortization manually. The formula is as follows:
i= interest payment
n=Number of payments
Amortized Loan Calculator
The other way to calculate loan amortization is using software such as Ms. Excel. It’s cheap and easy. You just need to know the best formula for each calculation and then arrange it according to your need.
Some websites also provide online services that we can use freely. However, for a more complex calculation in professional settings, it’s better to just build our own software.
Types of Amortized Loans
In general, loan amortization works best for long-term loans. Hence, it’s typically great for:
1. Home Loans
Mortgage loans around the world, including in Nigeria, are typically part of the amortized loans. When loan payments are amortized, it actually helps the debtors financially. They don’t have to pay the sky-high balloon payment, and they know exactly what percentage of their money goes to the interest and principal.
2. Car Loans
Car loans are usually shorter than home loans. It’s normally 5 years or less. However, car loan is also typically an amortized debt. With an amortized loan, you have a chance to reduce the interest if you pay off the principal sooner.
3. Personal Loans
Another common type of an amortized loan is a personal loan. A personal loan is a loan with a flexible purpose. The repayment duration is usually more than 3 years.
Pros and Cons When Loan Payments Are Amortized
There are both advantages and disadvantages to debt amortization. The benefits include:
- Give a clear understanding of which portion of the payment goes toward principal and interest.
- A fixed monthly payment that won’t exhaust individuals with limited financial capabilities.
- If we can pay the principal sooner, it will help reduce the interest expense and save our money.
In general, the view toward debt amortization is positive. However, it has its own disadvantages, such as when we use amortization in smaller loans. A monthly payment for a smaller loan can be deceptive to the borrowers.
When Loan Payments are Amortized in Nigeria
Just like anywhere else in the world, Nigerian banks and other financial companies provide several types of loans, whether they’re amortized loans or unamortized loans.
For the debtors, it’s better to ask the lenders what kind of loan they get. If it’s an amortized loan, the debtors can ask for a calendar or schedule.
It is critical to avoid financial companies engaging in shady behavior. As we know, the financial world has been growing rapidly in recent years. And no one wants to become a victim of such companies.
Loan Amortization in 2023
As of 2023, there are no significant changes to debt amortization. There are, however, several calculating programs that are worth to buy. As the fintech world becomes more competitive, it will undoubtedly benefit the accounting department.
With accurate and faster services, your financial companies will have a better reputation among the people. Eventually, it will be to your own benefit.
In the end, we can say that when loan payments are amortized, it means that the monthly payment will be constant until the end balance becomes 0. The amortization will help the debtors know their payment and avoid a balloon repayment at the end of the debt’s duration.
However, loan amortization also has its own cons. That’s why, it’s better to choose a loan, whether it’s an amortized loan or not according to our need.