Amortizing Loans vs. Non-Amortizing Loans

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Amortizing Loan

In an amortizing loan, the borrower makes regularly scheduled payments, called equated monthly installments, over the life of the loan to pay off the debt.  Each payment is consists of part interest and part principal.

The payment every month is fixed and is calculated in such a way that the interest portion of the payment is equal to the interest due for the month on the balance principal outstanding. The remaining portion of the payment is paid towards the principal. As more principal is paid every month, the outstanding principal balance keeps reducing. For this reason, this type of loan is also called a reducing-balance loan.

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