Lending Club Blog

Amortization Methods

Most people who have loans are familiar with the term amortization. In its simplest form, it simply means the reduction of the loan balance through regularly scheduled payments. For a given loan balance, interest rate, and term, the full amortization amount is the principal payment that will reduce your loan to zero over the normal term of the loan. Once you know your full amortization amount, there are four typical categories that you could fall into, depending on your loan.

Full Amortization
Paying the full amortization amount will result in the outstanding balance of a loan being reduced to zero at the end of the loan term. This is the most typical type of loan available, including the person-to-person loans available through Lending Club.

Partial Amortization
By paying a portion of your amortization amount, you will be reducing your outstanding principal on the loan each month. Paying a partial amount will result in an outstanding balance at the end of the loan term.

Interest Only

As the name suggests, paying interest only would not include any amortization payments. At the end of the loan term, the principal would be the same as at the start of the term.

Negative Amortization
Negative amortization loans require even lower monthly payments than interest only loans. As such, monthly payments actually increase the outstanding principal on the loan. The shortfall of payments to the interest amount gets added to the loan amount each month.

To summarize the four categories, consider the example of borrowing $250,000 with a 30-year loan: With full amortization payments, your loan would be paid off at the end of 30 years. With partial amortization, you would owe some amount less than $250,000 at the end of 30 years. With Interest Only, You would still owe $250,000 at the end of 30 years. With negative amortization, you would owe more (possibly much more) than $250,000 at the end of 30 years.

While the discussions over the other types of loans are generally held with regard to mortgages, all loans can typically be categorized in this way. P2P loans from Lending Club are fully amortized. Adjustable rate loans complicate things somewhat, but these same categories generally still apply.

Many of the loans that have been making the news lately fall into the categories other than full amortization. While partial payment, interest only, and negative amortization loans typically have lower monthly payments, I believe that these loans should be avoided. Full amortization loans set a more realistic bound on the type of purchases you can truly afford.

My opinion is that there is only one time when you should stray from the full amortization category: prepaying your loan. Paying more than the full amortization amount, when permitted by your loan issuer, will shorten the term of your loan. Straying into the other loan types is risky business and an action that I would certainly try to avoid.

Thursday, September 27th, 2007 at 6:48 am

Comments (0)


Welcome Home

Lending Club named #5 on Forbes’ Most Promising Companies List

Get ready for tax season with Lending Club’s Tax Form Guide

New Adjusted Return Metric

See more
Lending Club Awards
  • Archives z

Recent Posts

More Data Coming for Investors

We’re always seeking feedback and looking to make the… Read More »
November 10, 2015

Lending Club Surpasses $13 Billion

Check out our updated infographic to see what a… Read More »
October 29, 2015

Lending Club Launches Multi-Draw Line of Credit for Small Businesses

We’re excited to announce the… Read More »
October 16, 2015

Bloomberg Markets Names Renaud Laplanche on its 2015 “Most Influential” List

Read More »
October 6, 2015

Congratulations, Carrie! Named 2015 Financial Woman of the Year by The Financial Women of San Francisco

Read More »
October 5, 2015

Congratulations to Carrie Dolan – Named one of American Banker’s 2015 Most Powerful Women in Finance

Read More »
September 22, 2015

Welcome Nebraska, Kansas, and Indiana Investors!

We recently welcomed residents of Nebraska, Kansas, and Indiana… Read More »
September 21, 2015

Lending Club Job Spotlight: Technology & Member Support

Our Technology team develops and… Read More »
September 14, 2015

What $11 Billion Can Do

In celebration of surpassing $11 billion in loans and… Read More »
September 3, 2015

Welcome Arkansas, Iowa, and Oklahoma Investors!

We recently welcomed residents of Arkansas, Iowa, and Oklahoma… Read More »
July 14, 2015


We went public today!

Ringing the bell this morning at the New York… Read More »
December 11, 2014

New and Improved Statistics Page

We recently redesigned our Loan Statistics page to make… Read More »
November 13, 2014

Lending Club Honored with Economist Innovation Award

This month I was honored… Read More »
October 15, 2014

Welcome Vermont Investors!

Today, we’re thrilled to welcome residents of the state… Read More »
September 4, 2014

We filed to go public today

We filed a registration statement with the SEC today… Read More »
August 27, 2014

Our Billion Dollar Quarter

We’re excited to announce  that we’ve facilitated over $5… Read More »
July 8, 2014

Is Lending Club Available in My State?

Is Lending Club available in my state? That is… Read More »
July 7, 2014

Lending Club Joins Senator Cory Booker to Discuss Improving Access to Capital for Small Businesses

Read More »
June 20, 2014

Lending Club Named a CNBC Top 50 Disruptor for a Second Year

For the second year in… Read More »
June 17, 2014

PRIME is now Automated Investing

Lending Club is excited to announce that PRIME has… Read More »
May 14, 2014
View All w