Amortization Period (Loans) - Explained
What is a Loan Amortization Period?
Written by J. Mance Gordon
Updated at April 18th, 2022
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Table of Contents
What is a Loan Amortization Period?How Does the Amortization Period Work?Example of Amortization PeriodWhat is a Loan Amortization Period?
An amortization period refers to the total amount of time that a company uses before a loan, a mortgage or a debt is repaid in full. An amortization period vary from one company to another, it takes months or years depending on the nature of the loan. Loans often attract interest and the longer the time it takes a company to pay off the loan, the higher the interest on the loan. So, a company that selects a short amortization period will have lesser interest to pay than one that chooses a long amortization period. There is however, higher payments on the original amount of loan for a company that chooses short amortization period.
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How Does the Amortization Period Work?
Mortgage lenders charge interest on the loans they issue to companies, the longer the time to pay off a loan, the higher the interest rate. The length of time it takes a borrower to repay a loan in full is the amortization period. Oftentimes, payments on loans are made on a regular basis as agreed in the loan contract or term, this can be monthly or quarterly. Interest payment on long amortization period will accrue over time, while short amortization periods have lower interests. The mortgage or loan balance is often zero during the amortization period.
Example of Amortization Period
Here is an example of an amortization period; If a borrower is to pay $1,067.38 at $ 200,000, 5%, it will take 30 years to repay the mortgage, then the amortization period for this mortgage is 30 years (360 months). Amortization period in Canada is much shorter, depending on the period selected by the mortgage lender but it is often between 3-5 years. For instance, if the amortization period to meet the above payment is 3-5 years, then the monthly payment will amount to $ 5,989.57 as against 1,067.38 for 30 years. Only few people can afford this payment which is why 25 to 30 years is selected as amortization period except in cases whether the borrower selects a shorter period. Amortization period of 25 to 30 years however have higher interest payments.