A fully amortized loan is one of the most common types of loans available to consumers. Fully amortized loans are loans that are paid in equal installments for a set period of time. At the end of that period of time, the loan will be paid off, although based on possible rate fluctuation rates; the final payment may be higher or lower than the rest. They are offered for a variety of purposes, but most people think of a mortgage when they think of a fully amortized loan.
Fully amortized loans have two important characteristics that vary from consumer to consumer, term and rate.

Characteristics of Amortized Loans

The first important characteristic is term. A loan term is the amount of time the borrower has to pay off the loan. There are many different term lengths and they mostly depend on what the borrower is expecting to purchase with the loan. For example most cars have a maximum loan term of six years and most houses have a maximum loan term of thirty years. Typically higher priced items will take longer to pay, however, there is no set standard term for specific dollar amounts; it is mostly based on the product being purchased.

The second characteristic is interest rate. Banks offer many different rates, depending upon the amount of the loan, and the amount of risk involved in the loan. For example and person with a lower income and some bad credit history will be offered a higher rate than a person with a strong credit history and above average income.

Interest Rates

Finally there are two types of interest rates; fixed and variable. A fixed interest rate is when all loan payments are the same amount every month. As long as the loan remains in good standing, this rate will not fluctuate and can not be changed unless a borrower refinances the loan. If all payments are made on time every month, at the end of the loan term, the balance of the loan will be zero. This is a good example of the primary characteristic of fully amortized loans.

A variable interest rate fluctuates up and down with market. If your rate increases, the payment amount stays the same and at the end of the loan term, the borrower may have to pay extra in order to reach a zero balance. If the interest rate decreases the borrower may have to pay less on their final payment or in some cases the amount of payments on the term are actually shortened.