Try our free Amortization Calculator to estimate monthly loan repayments and also determines out how much of your repayments will go towards the principal and how much will go towards interest
There are numerous types of loans available, and they don’t all work the same way. Any installment loan is a loan that amortizes: you pay the balance down to zero over time with level payments.
Auto loans are often five-year (or shorter) amortized loans that you pay down with a fixed monthly payment. In fact, some people – including buyers and auto dealers – think of buying an auto in terms of the monthly payment alone. Longer loans are available, but you risk being upside-down on your loan if you stretch things out to get a lower payment (plus you’ll spend more on interest).
Home loans are traditionally 15-year or 30-year fixed rate mortgages. Most people don’t keep a loan for that long – they sell the home or refinance the loan at some point – but these loans work as if you were going to keep them for the entire term.
Personal loans that you get from a bank, credit union, or online lender are generally amortized loans as well. They often have three-year terms, fixed interest rates, and fixed monthly payments. These loans are often used for small projects or debt consolidation.
Credit cards are not amortizing loans. You can borrow repeatedly on the same card, and you get to choose how much you’ll repay each month (as long as you meet the minimum payment – but more is better). These types of loans are also known as revolving debt.
Interest only loans don’t amortize either – at least not at the beginning. During the “interest only period” you’ll only pay down the principal if you make optional additional payments above and beyond the interest cost.
Balloon loans require you to make a large principal payment at the end of the loan’s life. During the early years of the loan you’ll make small payments, but the entire loan comes due eventually. In most cases, you’ll refinance at that point (unless you have a large sum of money on hand).
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