What is Loan Amortization?

When you take out a loan you are borrowing money from a lender and most likely paying it back in small, monthly, increments until your balance reaches zero. These payments usually include both part of the principal borrowed and the interest you owe for borrowing the money from the lender. Have you ever wondered how these monthly payments are calculated so that you pay back your loan’s principal and interest in perfect increments?

When we keep track of how something changes incrementally over time we are doing what is known as amortization, and when applied to the world of finance and loans amortization is the process of how a loan is incrementally paid back over time. Loan amortization is the process of finding out how long the life of a loan is and how much each payment should be so that all of the principal and interest are paid back to the lender at the end of that period. Using finance math or a loan amortization calculator you can figure out what those incremental payments will be without much effort.

What Types Of Loans Are There?

There are many types of loans available to consumers, and unless you have a finance degree or work in the lending industry then you probably don’t know as much as you could, or should, about the types of loans available to you.

What is a loan?

A loan is, at its simplest, a type of debt that is owed from a borrower to a lender or lending institution. Although you can loan things that aren’t money, in this circumstance (and most circumstances) we are referring to a lender allowing a borrower to borrow money under the circumstances that the borrower will repay the money over time with a fee attached to it for its use.

An easier way to understand this relationship is to think of the fee you pay back to the lender, in addition to the funds you borrowed, as a rental fee for use of the money. Just like when you rent a house or apartment you are borrowing property and you are usually expected to pay for its use, and this is the same as money can be rented from a lender and the borrower is expected to pay rent on it while it’s being used – To the hopeful economic benefit of both borrower and lender.

What types of loans are there?

There are a tremendously large amount of loans available to consumers, and each one is engineered to fit the specific situation. There are two different types of parent category: Secured and Unsecured.

Secured Loans

Secured loans are the type of loan that comes to mind when thinking of any lending transaction requiring the use of collateral, like a mortgage loan, where the property itself is put up as collateral to lessen the risk for the lender. If the borrower defaults on the loan, the lender can repossess the property put up as collateral and sell it to recoup whatever potential losses there were.

Unsecured Loans

Credit cards, personal loans, lines of credit, and numerous other types of loans are all considered unsecured loans because they, unlike secured loans, aren’t backed by collateral and can be high risk to the lender. This is often why unsecured loans, like credit cards, can have very high interest rates (because of the extra risk to the lender) whereas mortgage loans can have very low interest rates (because there is less risk due to the extra collateral).

How to choose what loan is best for me?

When deciding upon what type of loan is best for you, it is best to seek the advice of an expert. After researching what loan you think is best for you, it is prudent to take it up with your financial advisor or even speak with a bank representative to point you into whether or not your choice fits your current needs. Being that there are so many different types of loans available, it is a great idea to consult with an expert to see if there happens to be something out there that fits your circumstances better than what your research has lead you to. Listening to an expert could end up saving you thousands of dollars in interest that you would otherwise have spent if you didn’t consult with them.

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