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As an example, my parents told me that their current car loan is amortized. Does that make any practical difference to how they pay off their loan, as opposed to if their loan had not been amortized?

  • Maybe this will help. – mikeazo Mar 14 '16 at 15:44
  • @JonH That's what I couldn't figure out before, whether amortization was bad or not. From MD-Tech's answer below, it seems like amortized loans are what I thought of as "normal" loans before (pay some principal and some interest), as opposed to only paying the interest. If that's the only difference between the two, it seems like amortized loans would be much better than interest-only loans. – Captain Delano Mar 14 '16 at 19:11
  • Maybe the housing bubble was due to all the non-amortizing loans...those seem very risky. No thank you I will stick to my traditional 15 year fixed rate no apr no pmi etc etc... – JonH Mar 14 '16 at 19:22
17

Amortizing loans pay off some of the value of the loan (otherwise known as principal) with each payment, whereas non-amortizing loans only pay the interest, so the full value of the loan is still owed at the end of the loan.

This means that with an amortizing loan you progressively pay off the loan value bit by bit as time goes on.

  • 2
    May want to add that because you pay off a small portion with each payment, the interest is less with an amortizing loan, since you don't have to pay interest on principle you've already paid back. – corsiKa Mar 14 '16 at 21:10

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