Calculating Amortization Schedule

An amortization schedule is a table that shows how a loan is paid off over time. It breaks down each payment into the amount that goes towards the principal and the amount that goes towards interest.

What is Amortization?

There are two general definitions of amortization. The first is the systematic repayment of a loan over time. The second is used in the context of business accounting and is the act of spreading the cost of an expensive and long-lived item over many periods. The two are explained in more detail in the sections below.

Paying Off a Loan Over Time

When a borrower takes out a mortgage, car loan, or personal loan, they usually make monthly payments to the lender; these are some of the most common uses of amortization. A part of the payment covers the interest due on the loan, and the remainder of the payment goes toward reducing the principal amount owed. Interest is computed on the current amount owed and thus will become progressively smaller as the principal decreases. It is possible to see this in action on the amortization table.

Credit cards, on the other hand, are generally not amortized. They are an example of revolving debt, where the outstanding balance can be carried month-to-month, and the amount repaid each month can be varied.

Amortization Schedule

An amortization schedule (sometimes called an amortization table) is a table detailing each periodic payment on an amortizing loan. Each calculation done by the calculator will also come with an annual and monthly amortization schedule above. Each repayment for an amortized loan will contain both an interest payment and payment towards the principal balance, which varies for each pay period. An amortization schedule helps indicate the specific amount that will be paid towards each, along with the interest and principal paid to date, and the remaining principal balance after each pay period.

Basic amortization schedules do not account for extra payments, but this doesn't mean that borrowers can't pay extra towards their loans. Also, amortization schedules generally do not consider fees. Generally, amortization schedules only work for fixed-rate loans and not adjustable-rate mortgages, variable rate loans, or lines of credit.

Example

Understanding Amortization Schedule Calculation

The Amortization Schedule is a method used to calculate loan repayments over time, showing how much of each payment goes towards the principal and how much goes towards the interest. This calculation helps in understanding the total cost of the loan and the breakdown of each repayment.

The key concepts of amortization include:

Amortization: The process of gradually paying off a loan through scheduled payments over time, typically in fixed monthly installments.
Principal: The original amount of the loan borrowed that is gradually paid off.
Interest: The cost charged by the lender for borrowing the money, which is paid alongside the principal.
Amortization Period: The length of time over which the loan is repaid, such as 15 or 30 years for a mortgage.

Calculating an Amortization Schedule

To calculate an amortization schedule, the following steps are typically taken:

Determine the loan amount (principal), interest rate, and loan term (number of payments).
Calculate the monthly payment amount using the loan amount, interest rate, and loan term.
Create an amortization table showing each payment, the portion that goes towards interest, the portion that goes towards the principal, and the remaining balance.

Example: A loan amount of $10,000 with a 5% annual interest rate and a 2-year term would result in an amortization schedule showing fixed monthly payments that gradually reduce the principal while covering interest payments.

Factors Affecting Amortization Schedules

Several factors influence the amortization schedule:

Interest Rate: The higher the interest rate, the higher the interest portion of each payment.
Loan Term: A longer loan term reduces the monthly payment but increases the total interest paid over time.
Loan Type: Fixed-rate loans have predictable payments, while adjustable-rate loans may change over time.

Types of Amortization Schedules

Amortization schedules can vary based on the loan type:

Fixed Amortization: Regular, fixed payments over the term of the loan, with the interest portion decreasing over time.
Balloon Amortization: Regular payments for a period, with a large lump sum (balloon payment) at the end.
Graduated Amortization: Payments start low and gradually increase over time.

Example: A fixed-rate mortgage with a 30-year term will have regular, fixed monthly payments where each payment gradually reduces the outstanding balance over time.

Real-life Applications of Amortization Schedules

Amortization schedules are widely used in the following scenarios:

Managing home loans (mortgages) and understanding the breakdown of monthly payments.
Determining business loan repayments and planning future financial obligations.
Helping borrowers understand how much of their monthly payment goes towards the principal versus interest.

Common Operations in Amortization Schedule Calculation

When calculating an amortization schedule, the following operations are common:

Calculating monthly payments using the loan amount, interest rate, and loan term.
Creating an amortization table that lists each payment’s allocation towards principal and interest.
Tracking the remaining loan balance over time.

Amortization Schedule Calculation Examples Table
Calculation Type	Description	Steps to Calculate	Example
Calculating Monthly Payments	Determining the fixed monthly payment amount for a loan based on the loan amount, interest rate, and loan term.	Identify the loan amount (principal), annual interest rate, and loan term (number of payments). Use the amortization formula to calculate the monthly payment amount. Verify the result by ensuring the sum of all payments equals the total loan amount plus interest.	A $10,000 loan at 5% interest for 2 years results in a monthly payment of $438.71.
Creating an Amortization Table	Generating a schedule that breaks down each payment's allocation to principal and interest.	Calculate the monthly payment amount. For each payment, subtract the interest portion from the total payment to determine the principal portion. Track the remaining loan balance after each payment.	For a loan with $438.71 monthly payments, the first payment may allocate $41.67 towards interest and $397.04 towards principal, leaving a remaining balance of $9,602.96.
Understanding Amortization Period	Determining the length of time required to repay the loan in full, based on the loan terms.	Identify the loan term in years (e.g., 30 years for a mortgage). Divide the total loan amount by the monthly payment amount to determine how many payments are required to pay off the loan. Ensure that the loan is paid off by the end of the amortization period.	A 30-year loan at 4% interest would require 360 monthly payments (30 years x 12 months) to fully repay the loan.
Analyzing Interest vs Principal	Understanding how each payment affects the principal and interest portions of the loan repayment over time.	For each payment, calculate the interest portion based on the current remaining balance and the interest rate. Subtract the interest from the monthly payment to determine the amount going towards the principal. Monitor the shift from interest-heavy payments to principal-heavy payments as the loan balance decreases.	In the early stages of a loan, a larger portion of each payment goes towards interest, but as the loan balance decreases, more of the payment is allocated towards the principal.