Loan Amortization Schedule
Prior to discussing what this subject refers to, let’s first tackle what the word amortization in finance means. Amortization is the term called to the process of compensating for a debt, such as a loan or mortgage, over a period of time through monthly payments. Now, what is amortization schedule? Amortization schedules play a vital role in ensuring that every payment on your amortization loan is paid off regularly or within the fixed period of time that has been agreed upon by both parties involved – the debtor and the bank or financing company.
Basically, it is defined as a table that displays each payment made at a fixed interval on an amortization loan, usually a mortgage. Amortization schedules are produced through an amortization calculator, which can be seen at various websites or can be provided by a finance expert or counselor who specializes and offers this type of loan.
Where is Amortization Schedule Utilized?
As we’ve mentioned earlier, amortization schedules are for the sole purpose of knowing and tracking your periodic payments in an amortization loan. However, how does an amortization loan work? And how does it differ from other types of loans that are offered by banks and finance companies? An amortization loan is a type of loan wherein the assets of the loan is paid off over the duration of the loan, depending on the amortization schedule, usually within similar or equal payments.
How to Create an Amortization Schedule?
For individuals who’ve taken out a loan and wish to know the precise amount of payments which are being distributed to the principal and interest, the creation of an amortization schedule is a must. You don’t exactly require the professional help of finance experts and counselors when making your schedule. Although, having one guide you during the process will definitely speed up the process. Regardless of the manner, here is a step by step guide on how you can create an amortization schedule the correct and simple way.
First, assess and obtain the variables of your respective loan. Gather the specifics of your loan including periodic payments, interest rates and the policies of your loan. Next, make a table you’ll use for your amortization schedule. Within the first column of the table, input each monthly payment for the loan. In the second column, input the amount of monthly premiums for that specific payment period.
For instance, let’s say that an individual is able to get a loan amounting $300,000 with 6% set for 30 years. The first column on your schedule will be numbered from 1 to 360 since there are approximately 360 months in the span of 30 years. The second column will include $1,798.65 for the 360 payments as that would be the amount per month that the loaner would have to pay for based on the example loan.
Next, make three more columns on the table. This will house three tabs, namely the Principal, Interest and the Principal Owed. Then, convert the loan’s interest rate into a monthly variable in decimal format. For example, the interest rate on the first example loan is 6%, which will then be converted to .06. Next, find the amount of interest you’re paying for every month. Using the first example, you’ll land on .005, which indicates the monthly interest rate.
After which, calculate the value of assets and interest that’s being compensated for every month. Again, using the example earlier, you’ll land on $1,500 for every $1,798.65 of monthly payments you make. The $,1500 is actually the value of interest on your loan. Include the new values you’ve obtained into your schedule and next to the first monthly payment. Deduct $298.65 from the loan balance and indicate it in the final column of the table. The total will be $299,701.35. Lastly, repeat the formula until you finish the schedule. Using the example given, you’d have to repeat the process another 359 times in order to complete the schedule.