Loan amortization schedule
| Loan amortization schedule |
|---|
| See also |
Loan amortization schedule is a list of all the periodic payments that need to be settled to repay the loan. Usually shown in a table, loan amortization schedule provides the payment breakdown into two portions - the principal and the interest. It also includes the loan balance at the beginning and the end of each period. Loan amortization schedule shows in detail and helps to understand how exactly the loan will be repaid[1][2].
Understanding loan amortization
To understand the loan repayment process it is crucial to realize that the loan installment includes not only the principal or loan amortization but also the interest. The amounts for both principal and interest are different each period but they sum up to the same value each time. Without the amortization schedule the borrower would see only the total installment payment. With that schedule the borrower can also easily check or predict the loan balanceat any time in the future. The interest amount is being calculated based on the loan balance. Higher loan balance means higher interest repayment. That is why the interest is always greater at the beginning of the repayment process and the loan balance is being repaid slower. Every amortization schedule should include at least five columns[3]:
- period - this column contains the period number (in most cases it will be the month number),
- installment amount - this column shows the payment amount for that specific period, including both principal and interest.
- principal - this is a portion of the loan balance that is being repaid for the period,
- interest - this is the cost of a loan, calculated based on the loan balance,
- balance - this column contains the loan balance still to be paid.
A good idea is to include one additional column which shows the cumulative, total interest paid. This is the sum of the interest paid up to date.
Amortization schedule in practice
Lets assume we borrow $100,000 with 6% interest rate for 30 years (360 months). The amortization schedule for our example would look like this:
| Period | Installment amount | Principal | Interest | Balance | Total interest |
|---|---|---|---|---|---|
| 1 | 599.55 | 99.55 | 500.00 | 99,900.45 | 500.00 |
| 2 | 599.55 | 100.05 | 499.50 | 99,800.40 | 999.50 |
| 3 | 599.55 | 100.55 | 499.00 | 99,699.85 | 1,498.50 |
| 4 | 599.55 | 101.05 | 498.50 | 99,598.80 | 1,997.00 |
| 5 | 599.55 | 101.56 | 497.99 | 99,497.24 | 2,495.00 |
| 6 | 599.55 | 102.06 | 497.49 | 99,395.18 | 2,992.48 |
| ... | ... | ... | ... | ... | ... |
| 357 | 599.55 | 587.71 | 11.84 | 1,780.81 | 115,820.35 |
| 358 | 599.55 | 590.65 | 8.90 | 1,190.17 | 115,829.26 |
| 359 | 599.55 | 593.60 | 5.95 | 596.57 | 115,835.21 |
| 360 | 599.55 | 593.58 | 2.98 | - | 115,838.19 |
Amortization schedule interpretation and summary
Based on the example shown in the previous paragraph the key takeaways regarding loan amortization schedule are[4]:
- the amortization schedule is showing exactly how a loan will be paid back,
- it provides the required loan installment for each period (in this case month),
- it breaks down the payment into the principal and the interest portion,
- the interest part is highest at the beginning of the repayment process as it is being calculated by multiplying the loan balance by the interest rate,
- the principal portion is lowest at the beginning as most part of the payment is covered by the interest,
- the loan balance is being reduced slowly at the beginning as the principal part is at its lowest,
- in this and other cases the total interest paid can be higher than the amount borrowed.
References
- Brigham E. F., Houston J. F., (2013), Fundamentals of financial management, Cengage Learning, United States of America
- Frensidy B., (2008), Financial mathematics, Penerbit Salemba Empat, Indonesia
- Garman E. T., Forgue R. E., (2014), Personal finance, Cengage Learning, United States of America
Footnotes
Author: Kamil Juszczuk
