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There are numerous loan types out there, all with different terms, rates and payback agreements. This is because not every loan works equally well for every person, or for that matter, for every lending institution. Different loans have varying degrees of risk for the lender as well as for the borrower, and it should be the goal of both parties involved in such a financial transaction to find the one that will work best for everybody. For mortgage, auto and other loans, one of the most common types is the amortized loan.

Amortizing is a very complicated word for a process that most of us take for granted. It is a loan where the principle is paid down over time, usually in equal amounts through the life of the loan, according to schedule worked out based on the length of the loan and the applied interest rate. The amortizing process calculates the full amount that will be paid including both interest and principal over the life of the loan, and breaks that amount down into monthly payments. A loan calculator offered by the lender can help the lendee determine what the overall “price” of an amortized or any other kind of loan will be. With this type of loan, every monthly mortgage payment (car, student loan, etc…) will be made up partly of principle and partly of interest.

This type of loan is advantageous in many ways. The interest rate is fixed at the outset, which means that while there may be some minor changes due to property values or the like, there will be no sudden, catastrophic increase in the payments. The other advantage of amortized auto loans and especially amortized mortgages is that they lend themselves to being paid off early. While there are usually penalties for paying the loan off significantly ahead of schedule, when one is looking at 30 years worth of interest, even overpaying by $25 a month can cut back nicely on the end amount paid, without invoking any kind of penalty clause. Other loan types include interest only, variable rates, and high-risk/bad credit loans.

Each of these has its own risks and benefits relative to the amount, time period and need of the borrower. One of the reasons so many loans are amortized, is because they are planned for the long-term. If the loan is an emergency short-term loan for debt consolidation or in some other way anticipated to be paid off quickly, the terms which work for a 30-year mortgage, or even 5-year car loan may not apply. This is why research into borrowing options and the use of a loan calculator is vital before signing a contract.