An amortized loan is when your monthly payments are the same for the entire period of the loan.
Every time you make a payment a portion of your payment goes to interest and a portion of the payment will go to your principal balance.
You will find that the majority of the payments you make at the beginning of the term will mostly go to interest and your principal balance will be lowered very little.
As time goes on and you make more and more payments you will begin to see more of your payment deducted from the principal.
In fact, you can order an amortization schedule which will outline the breakdown for each payment all the way through the entire loan. It will show how much goes to interest and how much goes to the principal balance.
This can be done for a mortgage loan even if it’s done for a 30-year mortgage. All 360 payments will have the breakdown.
Two examples of amortized loans are mortgage loans and auto loans.
If you want to pay off an amortized loan faster than the stated schedule you can make more than your standard monthly payment.
If you do this, especially with a mortgage it is a good idea to send a note explaining that the extra payment should be applied towards the principal balance. You should also be aware of the fact that if you want that payment to go to the principal balance it will not advance your payment due date.
For example, if you make a payment for your December payment which is due on the first, well now you are now due for January first of the next year.
Now let’s say you send in a payment and you request to have that payment applied to the principal balance only you will it will not count as your January payment and as a result, you will still be due for your January payment.
So you cannot have a payment reduce your principal balance and at the same time advance your due date.
Paying additional payments to the principal in this manner can work in your favor. You stand to save thousands of dollars in finance charges by paying off early.
Depending on the situation you could cut eight to ten years off of a mortgage loan. That additional money you save on a monthly basis by paying off your mortgage early could be used to invest or save or pay other bills.
Learn more here – https://www.investopedia.com/terms/a/amortized_loan.asp