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What Is Personal Loan Amortization?

Jim B.
Jim B.

Personal loan amortization takes place when a person who takes out an individual loan pays back the lender over a period of time. As each payment is made, the amount owned on the loan is lessened, a process known as amortization. Payments made on a loan reduce both the principal, which is the original amount borrowed, and the interest, which is determined by the interest rate and the amount of principal remaining. Borrowers may use a personal loan amortization calculator, readily available on websites, to determine how long it will take them to pay back their loans.

At times when people are in need of quick funds for some pressing reason, they may choose to take out a personal loan. These loans are beneficial in that they can be used for whatever purpose the borrower deems necessary. Lenders are usually banks or other financial institutions, and their reward for the risk of not being repaid is the return of the original amount borrowed plus interest payments. Whenever a person makes payments to reduce the amount owed, personal loan amortization is taking place.

Banks are common lenders of personal loans.
Banks are common lenders of personal loans.

To understand how personal loan amortization works, there are certain characteristics of all loans that need to be understood. The principal is the initial amount borrowed by the person taking out the loan, and that must be repaid along with the interest, which is determined by the interest rate agreed upon at the outset of the loan. Each loan has a set duration, which is the amount of time the borrower has to pay back the lender.

Payments made on a loan reduce both the principal, which is the original amount borrowed, and the interest, which is determined by the interest rate and the amount of principal remaining.
Payments made on a loan reduce both the principal, which is the original amount borrowed, and the interest, which is determined by the interest rate and the amount of principal remaining.

As each payment is made by the borrower, usually in monthly installments, the principal is reduced. The interest rate for the year is divided by twelve to determine the rate attached to the principal each month for interest. It is important to understand that the interest owed each month will be lessened as the principal dwindles. The more that a borrower can pay each month, the quicker the personal loan amortization will be.

Since the mathematics of personal loan amortization can be tricky, many borrowers can use a loan calculator to help them out. These calculators are widely available on the internet and require the lenders to simply enter data referring to their loans. By inputting the amount of the principal, the interest rate, and the duration of the loan, borrowers will be able to determine how much their monthly payments will be.

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    • Banks are common lenders of personal loans.
      By: imtmphoto
      Banks are common lenders of personal loans.
    • Payments made on a loan reduce both the principal, which is the original amount borrowed, and the interest, which is determined by the interest rate and the amount of principal remaining.
      By: Ghost
      Payments made on a loan reduce both the principal, which is the original amount borrowed, and the interest, which is determined by the interest rate and the amount of principal remaining.