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Fully vs. Partially Amortizing Loans


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TERMINOLOGY

An amortizing loan is a fancy way of saying a loan that is paid back in installments over time. Essentially all loans, unless they are paid back in one payment, are amortizing in one way or another. There are two main types of amortizing loans: fully amortizing and partially amortizing. 

Fully Amortizing Loans

These loans are made in payment installments throughout the entire term of the loan. For example, a fully amortizing loan for 60 months will have 60 equal monthly payments. Each payment will apply some to principle and some to interest, with most of the early loan payments going primarily to interest. As the loan period moves along, more of the monthly payment goes to the principle of the loan, assuming no extra payments have been made over the term of the loan. 

Partially Amortizing Loans

These loans are made in payment installments for the majority of the term of the loan. The difference here is that at either the beginning or the end of the loan, generally the end, a balloon payment of some sort must be made before the loan can be paid off. These payments are calculated using a longer loan term than there really is, which is why making monthly payments on the loan for 60 months will not pay the entire balance.