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SCHEDULE OF PAYMENTS
Amortization is the process of repaying a debt over a fixed period of time with fixed-sum payments. Mortgage payments, for example, are typically amortized over a period of 15 of 30 years. You pay the same amount each month until the loan is repaid in full. This is different from a credit repayment plan, for example, where you pay an amount of your choosing so long as it exceeds the monthly minimum.
What Is An Amortization Schedule?
The calculations of an amortized loan are best displayed in an amortization table.
Each period (e.g., month) is displayed as a single row in the table. For each period, the table shows the total monthly payment, the amount paid to interest, and the amount paid to principal as well as the outstanding balance. The outstanding balance at the end of one period is used to calculate the interest expense for the next period.
This calculator will build an amortization table for you. If you’d like to save the results to your desktop, use this Excel-based amortization schedule.
Understanding Amortization And Equity
Payments for an amortized loan are fixed over the lifetime of the loan, but the portion of each payment that goes toward interest will change over time.
Interest is, of course, calculated with respect to the outstanding balance. At the start of the loan term, when the balance is highest, a greater portion of each payment will go toward interest. Over time, as you pay down the balance, more of your money will go toward the principal balance.
In practice, this means that it can take a while to make a serious dent in the loan balance or to build equity if the loan is backed by an underlying asset.
When Are Loans Amortized?
There are many types of loans that are amortized. You’ve probably encountered at least a few of these in your everyday life:
- Auto loans: Auto loans are typically amortized over 24 to 84 months. Borrowers should approach long auto loan terms with caution, since the value of the car is likely to decline more quickly than the outstanding balance on the loan, assuming only monthly minimum payments.
- Houses and mortgages: Home loans are commonly amortized over 15 or 30 years. Long-term home loans are typically less risky than long-term auto loans, since the underlying asset (the home) will retain its value with regular upkeep and repairs.
- Student loans: Federal student loans are typically amortized over 10 years under what’s known as the Standard Repayment Plan. Repayment terms for private student loans vary, typically ranging from 7 to 10 years.
- Personal loans: Personal loans are typically amortized over 24 to 84 months.
What This Calculator Will Tell You
This amortization schedule calculator can help you determine what a fixed-sum repayment plan will look like over the lifetime of a loan. In particular, it will help you determine the following:
- How much of each payment will go toward interest
- How much of each payment will be applied to principal
- The impact of paying more than the required monthly minimum
- The total that you’ll pay in interest over the lifetime of the loan
- How long it will take you to repay a loan, given a fixed payment
What You Need To Know About This Amortization Calculator
To get started, you’ll need to know your starting loan balance and interest rate as well as the loan term or monthly payment.
Watch Out For Negative Amortization
Negative amortization occurs when you pay less than the monthly interest that accrues on your loan balance. The unpaid interest is added to the principal, causing the balance to increase. In subsequent periods, interest is calculated with respect to the higher balance. The result is higher overall interest costs over the lifetime of the loan.
The Amortization Calculator: Column By Column
There are six columns that make up this amortization schedule:
- Column 1 – Month: This calculator assumes that installment payments are made at regular intervals – one each month. This column marks the month in the repayment term.
- Column 2 – Payment: This is the fixed-sum monthly payment. You can enter a payment amount or the loan term. If you choose the latter, the payment is calculated using the starting balance, the interest rate, and the loan term.
- Column 3 – Extra Payment: This column shows optional extra payments, above and beyond the monthly minimum payment. Extra payments will reduce the amount of interest you pay over time, resulting in a shorter repayment term.
- Column 4 – Interest Expense: This column shows how much of each monthly payment goes to interest. It’s calculated by multiplying the periodic interest rate (annual interest rate / 12) by the previous month’s outstanding balance.
- Column 5 – Principal Paid: This column shows the amount of each payment that’s applied toward the outstanding balance.
- Column 6 – Outstanding Balance: This column shows how much you have left to pay, after your payment is applied to interest and principal.
What This Calculator Won’t Tell You
This calculator will help you understand a loan. But there’s still a lot it won’t tell you. For example, it won’t tell you if something is affordable. Or if it’s a smart purchase.
While you might not have any trouble affording the monthly payment on the loan you’re considering, you’re making tradeoffs. You’re not saving or investing that money. You’re not putting it toward things you might enjoy – a family vacation or a yoga class, for example. This calculator probably can’t help you decide whether the tradeoffs you’re making with your money are worth it.
What’s more, loan terms can be lengthy, spanning 10, 20, or 30 years. During that time, your situation can change, sometimes dramatically. Taking on debt can be risky, and you’ll need to decide what’s right for your situation.
If you’re looking into buying a house or car, or taking out a personal or student loan, this calculator can help you understand your repayment plan.
An amortization schedule will help you visualize the repayment plan, clearly indicating how much of each payment goes to interest and principal. However, it’s important to remember that this is just math.
Use your personal judgment to decide whether it makes sense to take on new debt. Take into account your personal finances, employment situation, and long-term goals.