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Loan Amortization Schedule

Loan Amortization Schedule

A loan amortization schedule is a useful tool to determine the amount left on a loan and the interest that will be paid.  Through the use of a loan amortization schedule tool, one will be able to determine the date of repayment, monthly principal and interest owed and the sum of all payments that will be made to the lender.  Although it is not particularly difficult for an individual to generate a loan amortization schedule, tools exist to guide borrowers through the steps of making a loan amortization schedule to help determine their future finances.

What is the definition of amortization?
The term amortization refers to the amount of the monthly payment made on a loan that decreases the principal owed.  You use a loan amortization schedule to determine how much the portion of the monthly payment that is not allocated to pay interest will decrease the principal amount owned.

How do I calculate a loan amortization schedule?
First, gather the following information (sample numbers included)
Loan Amount = $50,000
Loan term = 10 years
Interest rate = 12%
Amortization rates = monthly
Loan amortization can be calculated manually sometimes, but generally speaking, it is a better idea to use software or resources that are programmed to give accurate results on loan amortization schedules.  
Using an online loan amortization calculator, we find that the initial payment made is $717.35.  $500 is paid in interest, with the remainder paid toward reducing the principal.  Looking at the loan amortization schedule, we see that assuming the repayment began in January 2012, by Jan 2015, $406.37 is being paid in interest and $310.98 is paid toward the principal.  Only about $10,000 of the principal will be repaid that that point.  Toward the end of the loan amortization schedule, which ends on December of 2021, we see that more of the principal is repaid with each payment, while the share of the payment that is used to cover interest, declines, coinciding with the slowly reducing principal amount.

What are the issues with a loan amortization schedule?
A loan amortization schedule assumes that payments will remain exactly the same throughout the repayment of the loan.  Especially in arrangements with adjustable interest rates or lacking “balloon payments,” monthly payments can vary.  The lack of balloon payments allowed for more of the principal to be repaid early, thus reducing the interest that will be owed.  Use a loan amortization schedule as a benchmark to estimate how much a loan will cost and only use it as a guide if the loan is fixed and you know that you will not able to repay it early.  Payments may vary slightly due to rounding on the part of the lender although these discrepancies are usually adjusted at the end of the year.
As with all blended payment arrangements, interest will dominate the repayment at first and principal repayment will overtake interest repayment a bit of time after repayment has begun.  A loan amortization schedule can help you visualize when that will occur, which can be valuable information.