{"id":1768,"date":"2022-06-17T22:23:43","date_gmt":"2022-06-17T22:23:43","guid":{"rendered":"https:\/\/blog.ark7.com\/?p=1768"},"modified":"2024-01-25T23:27:29","modified_gmt":"2024-01-25T23:27:29","slug":"amortized-vs-interest-only-payment-schedules","status":"publish","type":"post","link":"https:\/\/ark7.com\/blog\/learn\/in-depth\/loans\/amortized-vs-interest-only-payment-schedules\/","title":{"rendered":"Amortized vs. Interest-Only Payment Schedules"},"content":{"rendered":"
\n
\n
\n
\n

\"\"<\/p>\n

Whether it was to pay for school, an engagement ring for the love of your life, the down payment for your first home, or a new car when it was finally time to upgrade, it\u2019s likely that at this point in life, you\u2019ve taken out a loan or two.<\/span><\/p>\n

You\u2019ve likely noticed that most loans follow a traditional payment schedule. This is known as amortization and tells borrowers how much of their payments are going to the loan\u2019s interest and principal balance. Amortization\u2019s aim is to make sure the loan balance reaches $0 by the end of the loan term.<\/span><\/p>\n

What you may not know is that there are also loans available that allow you to make interest payments during the first few years. They\u2019re called interest-only loans. In this post, we\u2019ll go over the details and key differences between amortized vs. interest-only payment schedules.<\/span><\/p>\n

What is an amortized payment?<\/b><\/h2>\n

Also known as an installment loan, amortized loans require equal monthly payments over a predetermined amount of time. Every month, a portion of the payment goes toward the principal of the loan, and another part goes toward the interest.<\/span><\/p>\n

During the time the\u00a0<\/span>investment<\/span>\u00a0is active, investors receive consistent and equal payments as previously defined in the amortization schedule. This allows for the investment amount plus interest to be completely settled by the end of the loan\u2019s term.<\/span><\/p>\n

The interest of an amortized loan is known as amortized interest. With this kind of interest, you\u2019re paid equal amounts monthly. A portion of the money will go toward interest and another part toward principal. The funds that go toward the principal are responsible for decreasing the balance of the loan.<\/span><\/p>\n

Amortized payments on fixed-rate loans allow borrowers to pay down the loan\u2019s principal and interest at the same time via one fixed monthly payment. As the payment schedule progresses and more payments are made, less goes toward interest, and more starts to go toward the loan\u2019s principal.<\/span><\/p>\n

There\u2019s also such a thing as partially amortized loans. These loans are also paid in installments, but a balloon payment is also made at the beginning or end of the loan.<\/span><\/p>\n

What is a repayment schedule?<\/b><\/h2>\n

Amortization schedules sound a lot more intimidating than they are. They\u2019re essentially just tables showing how much of each payment goes toward the loan\u2019s principal, how much goes toward interest, how much time is left on the loan (term to maturity), and the loan\u2019s new balance.<\/span><\/p>\n

What is an interest-only loan?<\/b><\/h2>\n

Unlike amortized loans that pay down both interest and principal, interest-only loan payments only cover the interest that\u2019s accruing on the loan. So, interest-only loans don\u2019t work toward paying down the loan balance at all – only the interest.<\/span><\/p>\n

At the end of the interest-only loan\u2019s term, a few options are available to the borrower:<\/span><\/p>\n