Loan Types And Loan Amortization

Whenever a lender extends a loan, some provision will be made for repayment of the principal (the original loan amount). A loan might be repaid in equal installments, for example, or it might be repaid in a single lump sum. Because the way that the principal and interest are paid is up to the parties involved, there is actually an unlimited number of possibilities.

In this section, we describe a few forms of repayment that come up quite often, and more complicated forms can usually be built up from these. The three basic types of loans are pure discount loans, interest-only loans, and amortized loans. Working with these loans is a very straightforward application of the present value principles that we have already developed.

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