Amortization of a Bank Installment Loan «

Amortization of a Bank Installment Loan


Most bank loans that a small business will take out are installment loans. Installment loans are paid back to the lender in equal (usually) payments over time. Installment loans usually have the highest interest rates of any bank loan. The process of providing for a loan to be paid off by making regular principal reductions is called loan amortization.

A common approach of loan amortization with medium-term business loans is to have the business (borrower) pay the interest on the loan each time period plus some fixed amount of the principal. Debt is said to be amortized when it is paid off gradually during its life. The principal payment is usually equal every time period, usually monthly or annually. Because of the equal principal payment, over time, the business pays less in interest every month or year and more in principal until the principal is paid off.

Here’s an example of how to create an amortization schedule for a business that borrows $20,000 at a 9% stated, or nominal, interest rate for five years. The bank loan is scheduled to be paid off in equal annual payments over the five year time period.

 

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