What Is Amortization Schedule?
An amortization schedule is a table that divides each loan payment into principal and interest. You can see how much of your payment goes toward paying off the loan balance and how much goes toward paying interest by looking at the schedule.
Definition 2
An amortization schedule is a log of each repayment, including the payment amount, payment date, and how much of the payment went toward the principal debt and how much went toward interest.
Definition 3
An amortization schedule is a tool that can help you calculate how long it will take to pay off a debt ultimately. By looking at the schedule, you can view the estimated sum at the conclusion of each payment month and how long it will take to pay off the loan completely.
Understanding the Term More Thoroughly
When you take out a loan, you must understand how much interest and principal you will pay throughout the life of the loan. An amortization schedule is one tool that might help you visualize the payback process.
The process of gradually repaying debt over time is referred to as amortization. Each loan payment reduces the amount owed and pays off some of the accrued interest.
An amortization schedule allows you to track the progress of loan repayment. It shows you how each payment is applied to the loan's principal balance and how much of each payment goes toward interest.
An amortization schedule usually includes the following information:
- Loan amount: The total amount borrowed on loan.
- Interest rate: The loan's annual interest rate.
- Loan term: The loan's length in months or years.
- Payment schedule: The regularity with which payments are made, usually monthly.
- Payment amount: The total amount of each payment, including principal and interest.
- Principal paid: The portion of the payment that is applied to the loan balance.
- Interest paid: The portion of the payment that goes toward repaying the loan's interest.
- Remaining balance: The loan's outstanding balance after each payment.
The amortization schedule indicates how each payment is divided between principal and interest and how the loan's outstanding balance is lowered over time. Initially, most of each payment was used to pay interest, with only a tiny percentage used to reduce the principal. But, as the loan is paid off over time, the proportion of each payment that goes to the principal grows while the amount that goes to interest declines.
Example
Let's look at a typical example to understand how an amortization schedule works. Suppose you take out a $100,000 loan with an 11% interest rate and a five-year repayment term. Using an amortization schedule, you can calculate your monthly payment of $20,000. Here's how the amortization schedule would look:
|
Payment |
Principal |
Interest |
Balance |
|
1 |
$20,000 |
$11,000 |
$80,000 |
|
2 |
$20,000 |
$8,800 |
$60,000 |
|
3 |
$20,000 |
$6,600 |
$40,000 |
|
4 |
$20,000 |
$4,400 |
$20,000 |
|
5 |
$20,000 |
$2,200 |
$0 |
Please keep in mind that the loan is repaid in 5 installments with a 5-year repayment term. Each year, the interest is calculated and added to the outstanding sum. The annual payment is computed by dividing the total amount owed by the number of years, in this example, $20,000 on an annual basis. The yearly interest rate is 11%, which is applied to the outstanding balance. As you can see, as the outstanding balance lowers, so does the interest part of the payment.
In Sentences
- An amortization schedule is a table that shows the payment schedule of a loan.
- An amortization schedule can also be used to compare different loan options and calculate the total cost of borrowing.