Amortization of a loan is the division of the amount owing, plus the amount of interest due on the entire loan, into equal sums for the purpose of repayment. When you repay a loan with amortization, you will be paying back some of the interest and some of the principal with each payment. This is different from a balloon loan where you will only pay back the interest to start with and the principal will be repaid at the end of the loan. If you have taken out an amortizing loan which will be repaid with interest, a loan amortization calculator is necessary to work out what your repayments will be over the course of the loan period.
There is an equation which will be used to calculate the amount of your monthly (for example) repayments. This is quite a complex equation and not one which you will want to be spending much time sitting down with and trying to understand. This is why it is so much easier to use a loan amortization calculator.
With a loan amortization calculator, all you will need to do is input some simple figures relating to the amount of the loan, the length of the repayment period, the frequency of payments and the interest that is being charged. The calculator will then do the rest and give you a reliable indication of your repayments. If your loan will be constructed using a combination of balloon, or bullet, payments and amortization payments, this must also taken into account in the calculation.
Some loan amortization calculators are only suitable for a straightforward amortization loan and make no allowances for the use of balloon and amortization repayments being used within the same repayment plan. Some, however, will request balloon information at the outset and will bring this into the equation. If you make enquiries via a search engine and check out some the websites which offer calculators you will probably be able to find some which will give very clear results regarding the repayments that you will have to make to clear the loan. With an amortization loan these repayments will all be an equal sum. They will, however, be made up of a different percentage of principal and interest with each payment. This is where the equation becomes complicated and the calculator becomes a vital tool. At the beginning of the repayment period, a high proportion of your repayment will be going towards the interest. This is because you are paying interest on a higher sum. As the loan progresses, this percentage will become lower and lower and the amount of the percentage of principal which you are repaying will increase.
Figures such as these can be clearly shown on a loan amortization calculator and some will even give a diagrammatic graph which will make things even more clear for you. A calculator such as this is an invaluable tool when considering a loan as it will save you a lot of time and energy when it comes to evaluating the repayments and proportions of interest and principal.