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How Loan Amortization Works

Oct 16, 2007
You have finally gotten your loan settled. Being free of the hassle of applying, putting up collateral, and reading through all the fine print and trying to understand all the terms and conditions, is the biggest relief you could possibly experience right now. Then, after about a month, you have received your first bill.

The loan you got was worth quite a bit of money, and it is going to take you some time to pay it off. When you receive the first bill, you realize that all they have charged you for this month, which is no small amount, is going almost completely toward interest. How can that possibly be?

Understanding how the interest is calculated into your loan and how you will be paying it can be quite a task. You can sometimes get discouraged because you do not feel like you are making any progress by making such a large payment on interest alone and very little on the principle balance. You want to know why more interest is paid at the beginning of the loan than at the end of it.

Interest is set and calculated differently depending on what kind of lender you have, the type of loan you are getting, how much was borrowed, and what your credit history is like. The interest on most loans is calculated with a specific formula. That formula may have different numbers based on the previously mentioned factors, but the equation is generally the same between most lenders.

In the equation, the first number that you are going to want to come up with is the actual principle multiplied by the interest. Once you have gotten that number, you divide it by three hundred and sixty five, or the number of days in a full calendar year. After you have done this, you multiply that number by the number of days have gone by since your last payment up to today. This is what they use to calculate how much interest you will be paying from month to month.

The interest you are paying at first is the actual percentage of the total balance that you began with. Once you have started to make those payments, the balance, or the principle, will go down because you are gradually paying it off. Because of this, though the percentage stays the same, the actual dollar amount you pay in interest actually decreases every time you make a payment, leaving you to pay mostly on principle the further along you get in the payment process.

Interest will obviously go up if you do not make your monthly payments on time. This will mess up the entire plan you have of paying off your bills. It will cost you more money in interest and it will probably take you longer to pay off because of it, so the best way to get out of that is to just make your payments on time and in full.
About the Author
Court is an internet marketing consultant and helps people to learn about internet marketing.
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