Amortized loan

An amortized loan is one in which the principal and interest are repaid over time via a series of equal payments made over regular intervals of time. Because all the payments are equal in value and are due on the same day of each month over the DURATION of the loan, the stream of payments is considered an ANNUITY. The most common amortized loans are those for car and home purchases.

The payment schedule for an amortized loan typically includes a listing of each payment, indicating how much of each payment goes toward the repayment of principal, how much is interest expense, and the remaining principal. Especially for long-term loans such as 30-year home mortgages, most of each monthly payment for the first couple of years is interest expense, with very little of the payment remaining for the repayment of principal. However, with each successive payment, increasingly less of it is interest expense, leaving more for the repayment of principal. This pattern continues over the life of the loan, and as the end of the loan period approaches, most of each payment goes to the repayment of principal.

The majority of amortized loans are MORTGAGEs (secured loans). Mortgages are backed by collateral, pledge ASSETS, titles, or deeds. With auto loans the lender retains title to the automobile until the last payment of the AMORTIZATION schedule is made. With the purchase of real property, the lender holds the deed to the real estate until the mortgage has been fully amortized (paid off ).