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What is an Amortization Schedule? Know How to Calculate Amortization?

IndianMoney.com Research Team | Posted On Thursday, January 02,2020, 03:23 PM

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What is an Amortization Schedule? Know How to Calculate Amortization?

 

 

While discussing the amortization schedule, we must gain insight into the process of amortization. Amortization is the process of repaying debt through equated monthly payments. The entire debt amount is spread across equal installments over the repayment tenure. Thus, parts of each payment go towards the loan principal and loan interest. Thus the amortization schedule lists the amount to be paid each month and shows the amount that goes towards interest payment and principal repayment.

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What is an Amortization Schedule?

The amortization schedule can be defined as the table that lists the regular payments on a mortgage over time. Thus a portion of each payment will be dedicated towards the payment of interest and the principal amount. Generally, you will find in the amortization schedule, a major portion of the EMI goes towards interest rather than the interest in the initial years. In the later years, the interest repayment declines and most of the payment goes towards principal repayment. The schedule is used to understand the progress of the loan over the years until it is paid in full.

See Also: How to Get Personal Loans Instantly?

Types of Amortizing Loans:

There are several types of loans available, however, not all the loans can be categorized as amortizing loans. The loans which are repaid in installments can be categorized as amortizing loans.

Auto Loans: These are short-term amortized loans that can be repaid within the tenure with fixed monthly payments. While buying a vehicle, most people opt for loans and the bank sanctions the loan based on the credit ratings of the borrower. However, the duration is kept small i.e. 5 to 7 years so that the loan value does not exceed the car’s resale value.

Home Loans: Home loans are usually offered for long tenures ranging from 15 to 25 years at fixed or floating interest rates. Most people try to pay off their loans early either by refinancing their loans or selling an existing property. The amortization schedule of home loans shows how you can pay off the loan within a given tenure.

Personal Loan: These are the loans usually borrowed by lenders to take care of miscellaneous expenses. The repayment schedule of such loans also ranges from 3 to 7 years and thus they fall in the category of amortized loans. They often have a fixed interest rate and thus are repaid through easy EMIs over the tenure.

See Also: When Should I Get a Personal Loan?

How to Calculate Amortization?

To calculate, you can use an amortization schedule calculator that allows you to estimate the monthly loan repayments. It determines how much of your monthly payments will be made towards the principle and how much towards the interest payment. To calculate, you can visit the website of online aggregators and click on the amortization calculator. Here you have to enter the loan amount, interest rate, term of the loan and date of starting the repayment.

Once you feed the above-mentioned data the amortization schedule calculator will display the following:

  • Amount to be paid each month and how much goes towards interest and principal repayment.
  • How much principal and interest have been already repaid at a specified date
  • How much principal and interest amount you owe
  • How you can reduce your repayment tenure by paying some extra amount.

Thus the amortization calculator can be beneficial for borrowers as it allows you to understand where you stand in terms of repayment of your long term loan. You can check how much principal amount you owe. You can determine how you can pay off your loan faster. For example, how you can pay off your mortgage in 20 years instead of 25 years. Using this you can also benefit if you pay off a certain amount within a fixed tenure. Most banks offer a waiver on interest amount on home loans for paying off a certain amount within a fixed timeframe.

See Also: Personal Loan In Bangalore

Amortization Schedule Process:

Several methods can be used to develop an amortization schedule. Listed below are a few:

  • Straight line
  • Declining balance
  • Annuity
  • Balloon
  • Increasing balance

The amortization schedule is chronologically ordered where each payment is broken down to show how much interest and principal is paid to date, principal paid to date and the remaining principal balance on each payment date.

Thus if you have debt in the form of home loans or personal loans and you want to pay it off early then you can opt for an amortization schedule. Online calculators can help you to analyze your loan and show you how much extra payment you need to make to pay off the loan faster.

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