AMORTIZED LOAN Meaning and
Definition
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An amortized loan is a type of loan that requires regular payments of both principal and interest over a specific period until the loan is fully repaid. The term "amortize" refers to the gradual reduction of a debt through regular payments. It is commonly used for long-term loans, such as mortgages, car loans, or student loans.
In an amortized loan, the borrower makes fixed monthly payments, which are calculated based on the original loan amount, the interest rate, and the loan term. Each payment includes a portion that goes toward reducing the principal balance and another portion that covers the interest accrued for that period. Initially, a higher percentage of the payment goes towards the interest, while the principal repayment gradually increases over time. This results in a predictable schedule of payments, with the total amount of interest paid decreasing over the course of the loan.
The amortization process ensures that the loan is fully paid off by the end of the agreed-upon term. The advantage of an amortized loan is that it provides borrowers with a structured and manageable repayment plan. It allows borrowers to gradually reduce their debt and build equity in an asset, such as a home, while making regular payments over an extended period of time.
Overall, an amortized loan is characterized by its fixed payment schedule, including both principal and interest, which allows borrowers to repay their debt gradually and predictably until the loan is fully amortized.
Etymology of AMORTIZED LOAN
The word "amortize" comes from Old French "amortiss-", which is the past participle of the verb "amortir", meaning "to extinguish" or "to kill". In the context of loans, it refers to the process of gradually paying off a debt over time.
The term "amortized loan" is derived from the verb "amortize" and is used to describe a loan where the principal amount is paid back in regular installment payments over the loan term. Each payment includes both the interest and a portion of the principal, allowing the debt to be gradually paid off over time. The goal is to eliminate or "kill off" the loan balance by the end of the loan term.
