Loan Amortization Defined

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Loan amortization describes the set schedule for paying off a loan with principal, interest and other related fees added in. Amortization typically takes place over a set period of years with interest payments much higher at the beginning of a loan and more going toward principal as the loan nears maturity. When loans are written, an amortization schedule is generally provided to illustrate the payoff structure and also define the overall bottom line with interest payments added in. There are factors that can alter a set loan amortization schedule both positively and negatively and even change the overall amount paid out.

Changing a Loan Amortization Schedule in a Good Way

Interest capitalization in a simple interest loan is based on the amount of principal outstanding and the interest rate attached to a loan. When borrowers pay extra amounts toward the principal on their loans, they can effectively reduce their loan length, the total amount paid out in interest and the overall time it takes to pay off a loan.

Negatives Changes to Loan Amortization

A loan amortization schedule outlines how a payoff will occur if payments are made on time and in the proper amounts. If a borrower fails to pay or pays less than he or she should, the overall length of time and total amount paid out can increase.