Business, Legal & Accounting Glossary
The schedule of payments for paying off a loan. An amortization schedule breaks down the payments into interest and principal, which is helpful because with an amortized loan these the amounts vary with each payment. Typically, an amortization schedule will also include additional information such as the amount of interest and principal paid, as well as the remaining principal balance. Amortization schedules are most frequently used with mortgages.
A loan amortisation schedule is a detailed table of periodic loan payments that shows the amount of principal and interest in each payment until the loan is paid off at the end of its term. Each recurring payment totals the same amount for each period.
However, because the initial outstanding loan balance, which is the basis for the interest calculation, is large early in the schedule, the majority of each payment is what is owed in interest; later in the schedule, the majority of each payment covers the loan’s principal because the outstanding loan balance decreases over time as payments are made.
The percentage of each payment that goes toward interest in a loan amortisation schedule decreases somewhat with each payment, while the amount that goes toward principal increases. Consider a loan amortisation schedule for a $250,000, 30-year fixed-rate mortgage at 4.5 per cent interest. The first few lines are as follows:
| Month | Month 1 | Month 2 | Month 3 |
| Total Payment | $1,266.71 | $1,266.71 | $1,266.71 |
| Principal Payment | $329.21 | $330.45 | $331.69 |
| Interest Payment | $937.50 | $936.27 | $935.03 |
| Interest to Date | $937.50 | $1,873.77 | $2,808.79 |
| Outstanding Loan Balance | $249,670.79 | $249,340.34 | $249,008.65 |
If you want to take out a loan, you can use a mortgage calculator to estimate your total mortgage expenses based on your unique loan, in addition to a loan amortisation schedule.
Borrowers and lenders utilise amortisation plans for instalment loans with predetermined payoff dates, such as a mortgage or a car loan. Loan amortisation schedules are created using precise calculations. These calculations may be integrated into the programme you’re using, or you may need to start from scratch when creating your amortisation schedule.
There is an easy approach to compute a loan amortisation schedule if you know the loan term and total periodic payment amount without using an online amortisation schedule or calculator. The following formula is used to compute the monthly principle owed on an amortised loan:
Principal Payment = Total Monthly Payment – [Outstanding Loan Balance x (Interest Rate / 12 Months)]
Consider a loan with a 30-year term, a 4.5 percent interest rate, and a monthly payment of $1,266.71. Multiply the loan balance ($250,000) by the monthly interest rate beginning in month one. Because the annual interest rate is one-twelfth of 4.5 percent (or 0.00375), the equation is $250,000 x 0.00375 = $937.50. As a result, the first month’s interest payment is made. Subtract that amount from the periodic payment ($1,266.71 – $937.50) to get the share of the loan payment allocated to the loan’s principle ($329.21).
To calculate the next month’s interest and principal payments, subtract the first month’s principal payment ($329.21) from the loan balance ($250,000) to get the new loan balance ($249,670.79), and then repeat the steps above to determine which portion of the second payment is allocated to interest and which to principal. Repeat these processes until you have an amortisation schedule for the whole term of the loan.
Scheduled payments, interest expenses, and principle repayment are all commonly included in amortisation tables. If you’re making your own amortisation schedule and want to make any additional principal payments, you’ll need to include an extra line for this item to account for any changes to the loan’s outstanding balance.
How to calculate the total monthly payment
When you take out a loan, your lender will usually specify the total monthly amount. However, if you are attempting to estimate or compare monthly payments based on a specific set of criteria, such as loan amount and interest rate, you may also need to calculate the monthly payment.
If you need to determine your total monthly payment for whatever reason, use the following formula:
Total Monthly Payment = Loan Amount [ i (1+i) ^ n / ((1+i) ^ n) – 1) ]
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This glossary post was last updated: 19th January, 2022 | 0 Views.