Amortization is commonly seen in loans which have long tenure such as property loans. For unamortized loans, your monthly principal repayment reduces your outstanding principal proportionally. But for amortized loans, most of the early repayment goes towards repaying the interest and has an impact when you decide to refinance the loan as your principal outstanding might be higher than an unamortized loan, especially in the earlier years.
Take for example a $100,000 loan with a 5 years tenure. For an unamortized loan of 5.46% or 3% reducing (please read Effective Interest Rate here) a year later - your balance outstanding would be $80,000 whereas your amortization schedule looks like this:
|
No.
|
Beginning
Balance
|
Payment
|
Principal
|
Interest
|
Ending
Balance
|
|
1
|
$100,000.00
|
$1,083.28
|
$628.28
|
$455.00
|
$99,371.72
|
|
2
|
$99,371.72
|
$1,083.28
|
$631.14
|
$452.14
|
$98,740.58
|
|
3
|
$98,740.58
|
$1,083.28
|
$634.01
|
$449.27
|
$98,106.57
|
|
4
|
$98,106.57
|
$1,083.28
|
$636.90
|
$446.38
|
$97,469.67
|
|
5
|
$97,469.67
|
$1,083.28
|
$639.79
|
$443.49
|
$96,829.87
|
|
6
|
$96,829.87
|
$1,083.28
|
$642.71
|
$440.58
|
$96,187.17
|
|
7
|
$96,187.17
|
$1,083.28
|
$645.63
|
$437.65
|
$95,541.54
|
|
8
|
$95,541.54
|
$1,083.28
|
$648.57
|
$434.71
|
$94,892.97
|
|
9
|
$94,892.97
|
$1,083.28
|
$651.52
|
$431.76
|
$94,241.45
|
|
10
|
$94,241.45
|
$1,083.28
|
$654.48
|
$428.80
|
$93,586.97
|
|
11
|
$93,586.97
|
$1,083.28
|
$657.46
|
$425.82
|
$92,929.51
|
|
12
|
$92,929.51
|
$1,083.28
|
$660.45
|
$422.83
|
$92,269.05
|
For amortized loans, your principal outstanding usually reduces each month while the interest component increases, making your monthly repayment amount stay the same each month. Known as Even Level Repayment, it is practised so that borrowers know what to expect each month.