There are
many different types of loans and credit lines that a consumer may secure.
Different types of loans are suitable for different purposes. While some loans
require a borrower to repay his/her debt over an extended period of time,
others require the debtor to pay a large portion of the debt when it matures. For example, when a corporation issues a bond to an individual, the business will provide the lender with interest payments over the length of the loan.
However, the lender will not receive compensation for the principal value of
the loan until the date of maturation. At this time, a corporation will be
required to pay the creditor the value of the loan that he/she initially
provided.
A common type of loan in the United States is an amortization loan. Loan
amortization occurs when a consumer repays a creditor over an extended period
of time, based on an amortization schedule.
Loan amortization occurs most frequently when an
individual obtains a home mortgage loan. However, various other types of
credit, including motor vehicle loans, may be amortization loans. An
amortization schedule will be developed utilizing an amortization calculator,
and a borrower will be obligated to adhere to this schedule when repaying the
lender.
Loan
amortization is typically regarded as beneficial to consumers because it provides an extended repayment plan for the debtor. The debtor, under an amortization agreement, is not required to pay a large sum
of money at a specified time. Because of the advent of loan amortization,
consumers are able to purchase property that they could not readily afford with
their available financial funds.
An
amortization schedule will indicate what a borrower will be obligated to pay
each month. In general, monthly payments will remain stable throughout
the duration of the loan. In many cases, the last payment will be slightly
higher than the previous payments. An amortization schedule will specify the
portion of a payment compensating for the principal value of the loan versus
the percentage going towards interest. Monthly payments do not provide equal
payment of interest and principal. Some payments may designate a larger portion
of the finances to cover interest, while others are used primarily to
compensate for the principal value of the loan.
Each time a debtor makes a monthly payment, he/she
is decreasing the debt that he/she is required to pay on a loan. When a
borrower adheres to the payments dictated by an amortization schedule, it is
less likely that he/she will default on the loan, and therefore, it is a safer
method for creditors.
Often
“sinking funds” and bonds are riskier for lenders. These types of
loans require a debtor to pay a large portion of the debt at a specified period
of time. This often occurs when the loan matures. However, if a
debtor is experiencing financial troubles, he/she may be unable to meet his/her
financial obligation. Therefore, the lender will lose the majority of assets or
resources that were loaned to the borrower. Loan amortization will help to
guarantee that a creditor receives compensation for at least a portion of the
loan.
