A fully amortized loan is a loan whose scheduled payments pay off the entire balance, both principal and interest, by the end of the term. The final scheduled payment leaves nothing left to owe.
A fully amortized loan is structured so that the regular payments are calculated to retire the whole balance, principal and interest, exactly by the end of the term. Because every payment includes enough principal to bring the balance to zero on schedule, there is no large remaining amount due at the end. This distinguishes a fully amortized loan from a partially amortized loan or an interest-only loan, which can leave a balloon payment to be paid at maturity. Fixed-rate installment loans and many fixed-rate mortgages are commonly fully amortized, which makes the payoff date and the total of payments known in advance.
The test for a fully amortized loan is the last row of its schedule: after the final scheduled payment, the balance is zero. Nothing is left over to refinance or pay in one large sum. That is different from an interest-only loan, where early payments cover only interest, and from a partially amortized loan, which ends with a balloon payment.
Because the payment is set to retire the whole balance by the end of the term, each scheduled payment is usually equal. That predictability is what lets a borrower plan the full cost of the loan from the first day, and it is why the total of payments on the disclosure can be read as the full amount owed on schedule.
Fully amortized loans can still differ in total cost. Two loans that both end at zero can have different rates, charges and schedule lengths, so the total of payments on each disclosure is the figure that shows which one costs more. What full amortization settles is the structure: no large payment waiting at the end.
An example
Two loans have the same amount and the same schedule length. The first is fully amortized, so its last payment looks like every other payment and brings the balance to zero. The second is partially amortized, so its regular payments are smaller but its final payment is a large balloon covering the rest of the balance. The borrower compares both totals and the size of the final payment before choosing.
Common misconceptions
Myth: Fully amortized means interest-free.
In fact: Each payment still includes interest. Fully amortized means the payments cover both interest and principal completely by the end.
Myth: A fully amortized loan cannot be paid early.
In fact: It can be paid early if the agreement allows it; without a prepayment penalty, doing so reduces the interest paid.
Myth: Any loan with equal payments is fully amortized.
In fact: Equal regular payments can still be followed by a balloon. The final payment and ending balance are what show whether a loan is fully amortized.
What to check
- Whether the final payment is the same size as the regular payments.
- Whether the schedule ends at a zero balance.
- Whether early payoff is allowed without a penalty.
- The total of payments over the full schedule.
How this applies at Desert Rock Capital
Every Desert Rock Capital loan is fully amortized. Payments are fixed and biweekly, each one covers interest and part of the principal, and there is no balloon payment at the end. There is also no prepayment penalty, so paying ahead of the schedule reduces the interest you pay.
Based on our loan requirements, loan amounts and application pages. Your actual terms are in the loan agreement.