What are Amortised Loans?

Posted on Monday, January 27th, 2025 | By IndusInd Bank

Whether you are applying for a personal loan or borrowing money, it is crucial to understand how personal loans work. This is especially relevant if you are applying for a loan, which requires long-term repayment. A common term you may have come across when learning about credit and repayment is amortised loans.

So, what is an amortised loan? It is a type of credit where the repayment covers the principal and the interest over time. This process is also referred to as the amortisation of a loan. 

Here’s a detailed guide on the meaning of loan amortisation, how it works, its benefits, and more. 

What is an Amortised Loan?

An amortised loan is a loan in which the borrower repays the principal and interest over a fixed period through regular payments. These are called EMIs (Equated Monthly Instalments). 

The process of loan amortisation helps ensure that the loan is paid off over a specific time frame. It also helps the borrower, since the interest payments gradually reduce while more of the principal is repaid each month.

How Does an Amortised Loan Work?

Now that you know what an amortised loan is, let’s understand how such a loan works.

• When you apply for an amortised loan, the lender/bank will provide you with a schedule. This includes a fixed repayment amount for each month.  

• These equal periodic payments include both interest and principal components. 

• Early in the repayment schedule, most of the payment goes toward covering the interest. 

• Over time, the outstanding principal decreases. Then, a larger portion of each payment is allocated to paying down the principal. This leads to a gradual decrease in the overall debt amount.

• By the time the loan term ends, the borrower has fully repaid the loan.

• The loan amortisation process ensures the borrower gradually repays both the loan balance and the interest cost.

Understanding Amortisation Schedule

To better understand the amortisation of loan meaning and its workings, one must look at an amortisation schedule. It is a detailed table that outlines each loan payment over the term of the loan. 

Below is a simplified example of an amortisation schedule for a personal loan:

Here’s a brief explanation of each aspect of the schedule: 

– Opening Loan Balance: The remaining amount you owe at the beginning of the month.

– EMI: The fixed monthly payment.

– Interest Repaid: The portion of the EMI that goes toward interest for the month.

– Principal Repaid: The portion of the EMI that reduces the loan balance.

– Closing Loan Balance: The remaining balance after the EMI payment.

A loan amortisation schedule can also contain other elements, as per prevailing bank guidelines. For instance, the amortisation schedule for credit card EMIs will also include GST charges. 

Importance of Following the Amortisation Schedule

Following the loan amortisation schedule is essential for several reasons:

1. Debt Management

It helps you stay on top of your debt repayment and ensures the loan will be paid off by the end of the term. Late payments can lead to penalties, additional interest, and a longer repayment period.

2. Budgeting

A clear understanding of your repayment schedule helps you plan your monthly budget with ease. A personal loan EMI calculator is one such handy tool that to get an idea of your EMI based on the loan terms.

3. Interest Savings

Sticking to the schedule ensures that you pay off the loan as quickly as possible. This reduces the total interest that needs to be paid over the loan tenure. Any delay or missed payment can increase the overall interest burden.

4. Credit Score

Paying your EMIs on time has a positive impact on your credit score. This can improve your eligibility for other financial products, such as credit cards or home loans.

Also Read: Here’s Why You Shouldn’t Miss Repaying Even a Single EMI on A Personal Loan

Conclusion

To sum it up, any borrower must understand the loan amortisation meaning and the schedule that comes with the loan. This will help borrowers pay off their debts through regular instalments, with decreasing interest costs and increasing principal repayments. 

If you are looking to secure an amortised loan, consider exploring IndusInd Bank’s Instant Personal Loan options. With a 100% online application process, flexible repayment terms, competitive interest rates, no collateral requirements, and many other features, you can borrow with ease and peace of mind. Apply now! 

Disclaimer: The information provided in this article is generic and for informational purposes only. It is not a substitute for specific advice in your circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any financial decisions based on the contents and information.