Amortization table

Amortization table
See also

Amortization table is a table containing a schedule of payments that are required in order for the debt to be retired[1]. It gives information about the specific time and amount of each payment and divides the payment amount into two parts - interest and principal. It also provides the outstanding loan balance after each payment[2].

Understanding amortization schedule

When taking long-term loan in a bank a good idea is to ask for the amortization table. This will give vital information which will help to gain better understanding of the loan process. Thanks to the amortization table you will be able to predict your interest cost or outstanding balance at any given point in the future. Basically every amortization table should be structured into at least six columns[3]:

  • month - this column will contain the month number,
  • beginning balance - this column will include the loan balance before the payment, it is illustrating how much from the originally borrowed sum we still need to pay back before that payment,
  • scheduled payment - in this column you can see the payment amount for that specific period, including both principal and interest.
  • principal - this amount is a part of the original sum of borrowed money we are paying back,
  • interest - this column includes bank interest only, this is the amount we need to pay back extra. That amount is not reducing the loan balance. The total interest paid will depend on the interest rate the bank has offered,
  • ending balance - in this column we have the loan balance amount that is left to pay back after the specific payment.

A good idea is to include one additional column which shows the cumulative, total interest paid.

Sample amortization table

Lets assume you borrow $100,000 with 6% bank interest rate for 30 years. You have equal payments on a monthly basis (360 months). As observed in the table, at the beginning most of the payment amount is interest which is caused by a high loan balance. The lower the loan balance the lower the interest as it is being calculated strictly based on the amount borrowed. The total interest paid in this example is over $115,000 - it is more than we have borrowed.

Month Beginning balance Scheduled payment Principal Interest Ending balance Total interest
1 100,000.00 599.55 99.55 500.00 99,900.45 500.00
2 99,900.45 599.55 100.05 499.50 99,800.40 999.50
3 99,800.40 599.55 100.55 499.00 99,699.85 1,498.50
4 99,699.85 599.55 101.05 498.50 99,598.80 1,997.00
5 99,598.80 599.55 101.56 497.99 99,497.24 2,495.00
6 99,497.24 599.55 102.06 497.49 99,395.18 2,992.48
... ... ... ... ... ... ...
357 2,368.52 599.55 587.71 11.84 1,780.81 115,820.35
358 1,780.81 599.55 590.65 8.90 1,190.17 115,829.26
359 1,190.17 599.55 593.60 5.95 596.57 115,835.21
360 596.57 599.55 593.58 2.98 - 115,838.19

Amortization table summary

The key notes to take away[4]:

  • amortization table is showing exactly how a loan will be paid back,
  • it provides the required payment for each period (month),
  • it breaks down the payment into principal repayment and interest,
  • the interest payment part is always higher at the beginning of the repayment process as it is being calculated by multiplying the loan balance by the interest rate,
  • the loan balance is being reduced through principal repayments.

References

Footnotes

  1. Kowalski T. J., (2002), p. 261
  2. Federer Vaaler L. J., Daniel J. W., (2009), p. 212
  3. Garman E. T., Forgue R. E., (2014), p. 271
  4. Brigham E. F., Houston J. F., (2013), p. 170

Author: Kamil Juszczuk