Amortizing is the financial process by which a debt is gradually extinguished through periodic payments that can be of the same or different amounts. That is, amortize means gradually repaying the capital of a loan or a credit.
The most common is that the payment of these obligations is made through staggered disbursements over time, although a single payment can also be agreed at the end of the period.
There are various amortization methods, although they are usually proposed by the booth. These forms of amortization affect the amount and composition of the periodic installments that the client will have to pay, these installments normally comprise both capital and part of the interest on the debt. The main amortization methods are:
- French amortization method or constant installments: It is one of the most used, the installment of this method adds the part of the amortized capital plus the interest that goes down as the debt is reduced, since the capital pending amortization is every lower time. It is usually used in both fixed and variable interest loans.
- American amortization method or at maturity: This method is characterized by periodically paying only the interest on the debt and in the last installment the borrowed capital is amortized, that is, the requested capital is amortized at the expiration of the operation in a single payment.
- Constant repayment of capital or Italian method: This method consists in setting a constant amount of the loan amount, and with each installment, both the capital pending repayment and the interest on the debt are obviously reduced.
- Method of amortization of increasing installments: In this case the amount of the successive installments grows progressively, both the part of the principal capital and the interest are variable.
- Declining installment amortization method: This case is the inverse of the previous one, the amount of the installments decreases over time.
- Amortization method of fixed installment with variable repayment term: In this case the amount of the installment is always the same but if the rates go up the repayment period is lengthened, if during the life of the loan the rates go down, the time is reduced due date.