Loan amortization Research

Document Type:Research Paper

Subject Area:Finance

Document 1

Amortization is helpful in knowing how borrowing works, for example, the true cost of borrowing and decision making. The true cost of borrowing helps consumers make decisions based on the affordability, interest cost measure what is being bought but a lower monthly payment means paying more interest. Decision making helps in deciding which loan to choose based on the lender terms, calculating saving by paying the debt early skips off the remaining interest changing the loan, for example, a pie chart with loan balances as vertical x-axis and time as horizontal y-axis with line going down and to the right, the shorter time loan is more or less straight while the longer time loan gets steeper as time goes on. An amortization schedule is a loan payment table showing the principle and the interest made until the loan is paid off at the end of the term.

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Each payment is the same in the beginning that is the interest while at the end each payment covers the loan principal. The relationship between interest payment and amortization schedule. Amortization schedule explains how a loan is paid off with the principal amount of each monthly mortgage payment. A fixed rate mortgage is calculated based on the loan amount, interest rate and term usually 15 or 30 years to be paid off. The mortgage payments are determined monthly that is the annual rate divided by 12, the principal is the payment remaining after the interest is determined interest is smaller and the principal is bigger. The monthly mortgage speeds up the pay down of the loan with extra principal payments that is the lower the interest the higher the principal (Yoshino, 1991).

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