What Is Loan Amortization?
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An amortization schedule lets you know exactly how much of each payment is going towards interest and how much is going towards principle in
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Hi, I'm Kaytie Sproul, here for About.com, and today we're going to answer the question: "What is loan amortization?", using information from About.com's Banking and Loans site.

At some point, most of us will have to take out a loan for something. Before doing so, it's important to understand the mechanics of borrowing and lending, including loan amortization. Let's take a closer look.

To put it in its simplest terms, loan amortization is the paying off of debt over a specified allotment of time with periodic payments. Anytime you take out an installment loan, like a car loan for example, the loan amount is divided into recurring payments over a fixed period of time, with the loan's interest rate added in. This, in a nutshell, is amortization.

Examples of Loan Amortization

To see it in action, we can take a look at an example car loan. Let's say you take out a car loan of \$15,000, with a typical repayment period of 36 months, and an interest rate of five percent. Once amortized, you will have a monthly payment of \$283.06. So you may be asking yourself, "How do we find an amortized payment, or set up an amortization schedule?"T hankfully, there are an abundance of calculators, both real and online that will do the heavy lifting for us, like this one on About.com's Banking site.

For this example let's assume we are looking at a home loan of \$100,000, with a six percent interest rate, and a loan term of 30 years. We begin by entering in the loan amount, followed by the interest rate, and then the length of the loan. To accurately create an amortization schedule, we'll also need to enter the start date of the loan. Upon hitting calculate, we see that our payment will be \$599.55; but it's important to note that there is more to an amortization schedule than simply determining your monthly payment. The schedule lets you know exactly how much of each payment is going toward interest, and how much is going toward principle. This is a fluid and ever-changing ratio. As we can see from our amortization schedule, the bulk of the payments for the first 18 years of the loan will be going toward interest.

During the last portion of the loan term, the payments will be almost entirely toward principle. Borrowing and lending is an integral part of our modern world; therefore, it benefits us to understand how it works. Having a strong knowledge of loan amortization will help you better ascertain how much you can afford, as well as know where you stand with your loan over its life.