What is an amortized loan?

An amortized loan is characterized by being repaid in equal installments over a specified period. Each payment typically covers both principal and interest, allowing the borrower to gradually reduce their debt over time. This structured repayment plan makes it easier for borrowers to budget their finances, since they know exactly how much they need to pay each month.

In contrast, loans with fluctuating interest rates, those requiring a balloon payment, or loans exclusive to commercial properties do not fit the distinct nature of an amortized loan. These types may have varying payment structures or requirements that do not provide the borrower with the predictability and steady repayment that an amortized loan offers. Understanding the mechanics of amortized loans is essential for recognizing their benefits, such as building equity and establishing a clear timeline for debt repayment.