Amortized Loan

Because it uses the word "amortized," these loans sound very snooty. Like if you were to meet someone named Chester Hamilton Festerbottom IV. You'd assume he comes from a long line of monocle salesmen. But you don't know him...he might enjoy Mr. Pibb and MMA and own a tattoo parlor down by the airport.

Same with amortized loans. They aren't snooty. They're actually very down to Earth. All the things you likely think of first when you think of loans (car loans, home loans, personal loans) typically fall under this category.

Amortized loans are just ones that are paid off in installments. The interest and principal are figured up front and then divided into regular payments.

Say you're buying a $20,000 car. You put $5,000 down and will be getting a 60-month loan for the rest of the cost, with a 5% interest rate. So $15,000 at 5% over five years. So that's $750 a year in interest (5% of $15,000) times five years (making a total of $3,750 in interest for the life of the loan). So you'll be paying the lender $18,750 total ($15,000 principal + $3,750 interest). Divide that by 60 months and you get a monthly payment of $312.50.

Often times, the loan schedules are organized so more interest is paid in the early stages of the loan, with the majority of the principal getting paid off later.