Everyone who has ever dealt with borrowing money should hear the term “Amortized Loans” which refers to a modern process of breaking down loan amount into stable monthly payment schedules. In all the schedules, a uniform amount is paid which include a portion of both the principle and interest amount. Currently, amortized loan is the most popular form of loans, making the loan repayment process easy and straightforward.
Given the advantages and the popularity, nearly all the loans- unless they are repaid in a single payment- are amortized in some way or other. There are two major types of amortized loans: Fully Amortized Loans and Partially Amortized Loans.
Here are the key differences between these two types of amortized loans:
Fully Amortizing Loans
Fully Amortized indicate that the per month payment amount is distributed among the whole loan period. For instance, a fully amortized loan for 240 months- this would be a 20 year loan, having 240 identical monthly payments. Each payment will include a portion of principle among and a portion of interest amount, with most of early payments going mainly to interest. And as the time moves on, more of each installment goes to the principle amount of the loan, assuming no additional payments have been made over the period of the loan.
Partially Amortized Loans
Partially Amortized Loans are nothing too different from Fully Amortized Loans as the main difference is that at either the start or the end of the loan period, normally the end; a specific balloon payment must be made before the full loan amount can be paid off. Another difference is that partially amortized loans are calculated using a longer loan period than there actually is, that is why making monthly payments on the loan for the period of the loan will not pay out the total balance, keeping an amount due at the end of the loan period. Because of its large size, the final payment is known as balloon payment. Even the partially amortized loans are often called as “Balloon Loan”.
Example: If someone had taken a loan of $500,000 and $400,000 was amortized over a period of 20 years, the remaining $100,000 would be due straight away, in one lump sum, at the end of the loan period.