Amortization Refers to the Repayment Schedule
Amortization is the repayment of loan principal over time. It simply means that you pay back a loan balance through regularly scheduled payments.
For any P2P loan you are about to invest in, you should pay attention to the amortization method. It tells you if you will get monthly repayments and interest on your account or not.
With repayments of the principal, your monthly interest will be lower each month, since the interest is based on the remaining principal.
If you invest in a loan with full amortization, the outstanding balance (principal) at the end of the loan term will be zero. The loan is paid back in full. This is the most typical type of loan available, including most person-to-person loans.
The repayment schedule may have equal sums each month. In these cases, a larger amount of the payment consists of interest at the beginning of the repayment schedule, while more money is applied to principal at the end (known as an equated monthly installment).
The partial amortization method means that a part of the principal on the loan is paid back each month. At the end of the loan term there is still an outstanding balance on the loan. The loan is not yet paid back in full.
The size of the remaining balance depends on the terms of the loan. With a large balance it’s an increased risk that the borrower may end up in default.
On an Interest Only schedule, you will receive interests each month but no repayments of the principal. At the end of the loan term, the principal remains the same as at the start of the term. It may be paid back in full at the end of the term or replaced by a new loan.
Your monthly interest remains the same month after month, since it is based on the same principal.