Amortization table
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.
Examples of Amortization table
- An example of an Amortization table is a loan amortization schedule, which is a document that shows the details of a loan, including the principal balance, interest rate, and amount of payments that are due each month. The amortization table shows how much of each payment will go toward principal and how much will go toward interest, as well as the remaining balance after each payment.
- Another example of an Amortization table is a mortgage amortization schedule. This document shows the details of a mortgage loan, including the principal balance, interest rate, and amount of payments that are due each month. Like a loan amortization schedule, it also shows how much of each payment will go toward principal and how much will go toward interest, as well as the remaining balance after each payment.
- A third example of an Amortization table is a bond amortization schedule. This document shows the details of a bond, including the face value, coupon rate, and amount of payments that are due each year. The amortization table shows how much of each payment will go toward principal and how much will go toward interest, as well as the remaining balance after each payment.
Advantages of Amortization table
Amortization table is a useful tool for tracking and managing loan payments. It helps to calculate and track payments towards the loan principal and interest, as well as provide an overall picture of the loan's progress. The following are the advantages of an amortization table:
- It helps to plan loan payments and make sure they are made in a timely manner.
- It allows borrowers to calculate the total cost of the loan, including principal and interest, over the life of the loan.
- It helps borrowers to identify how much of each payment goes towards the principal and how much towards interest.
- It is a useful tool for budgeting since it makes it easier to anticipate future payments and make sure that loan payments are kept up.
- It helps to determine how much money is saved over time by making extra payments towards the principal.
- It helps to identify if refinancing is a viable option to save money or shorten the loan term.
Limitations of Amortization table
Amortization tables provide a schedule of payments necessary to pay off a debt, but it does have some limitations. Specifically, the limitations of amortization tables include:
- Not accounting for additional payments or prepayments - Amortization tables are based on an assumption that only the regular monthly payments are made. If additional payments are made, or if an entire loan is prepaid, the remainder of the loan may be paid off sooner than expected.
- Not accounting for changing interest rates - Amortization tables are designed to use the interest rate that is in effect when the loan is taken out. If the interest rate changes, the payments required to pay off the loan may change, making the amortization table inaccurate.
- Not accounting for changes in the term of the loan - Amortization tables assume that all payments are made on time and that the loan will be paid off in the same amount of time as originally agreed upon. If the loan term is changed, the amortization table may no longer be valid.
The Amortization table is a helpful tool to aid in debt repayment, but there are other approaches to tracking payments and paying off debt. These include:
- Budgeting: Creating and following a budget can help individuals track their expenses and plan for debt repayment.
- Refinancing: This process involves taking out a new loan and using the proceeds to pay off existing debt.
- Prioritizing: Prioritizing debt repayment can help individuals focus their efforts on the most important debts first.
- Debt Consolidation: Consolidating loans and debts into one payment can make debt management easier.
Overall, the Amortization table is a useful tool to help individuals understand their debt repayment process and track their progress, but there are other approaches that can also be employed.
Amortization table — recommended articles |
Loan amortization schedule — Sinkable bond — Automatic Premium Loan — Net cost — Yield maintenance — Adjustable Life Insurance — Unearned Premium — Accounts Receivable Aging — Accrual rate — Time budgeting |
References
- Brigham E. F., Houston J. F., (2013), Fundamentals of financial management, Cengage Learning, United States of America
- Federer Vaaler L. J., Daniel J. W., (2009), Mathematical interest theory, The Mathematical Association of America (Incorporated), United States of America
- Garman E. T., Forgue R. E., (2014), Personal finance, Cengage Learning, United States of America
- Kowalski T. J., (2002), Planning and managing school facilities, Theodore J. Kowalski, United States of America
Footnotes
Author: Kamil Juszczuk