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Amortized loan are installment loans where monthly payments are used first to reduce the interest balance, and the remaining amount will be used towards the principal balance. The advantage of this type of loan is that a larger portion of payments goes towards principal and progressively smaller portion towards the interest. Amortized loan is also known as level payments loan.
The amortized loan has two major effects:
1. Credit risk- it substantially reduce the credit risk of the loan or bond; and
2. Interest rate risk- it reduces the duration of the debt.