Loan Amortization Schedule

Loan Amortization is the gradual repayment of a debt over a period of time. In order to amortize a loan, your payments must be large enough to pay not only the interest that has accrued but also to the principal.

As per Wiki – “In banking and finance, an amortizing loan is a loan where the principal of the loan is paid down over the life of the loan (that is, amortized) according to an amortization schedule, typically through equal payments.”

In simple terms, Amortization happens when you pay off a debt over time with regular, equal payments. With each monthly/quarterly payments a portion of the money goes to the principal amount and the other to interest amounts.

Generally, your interest costs are at their highest at the beginning of the loan. Especially with long-term loans, the majority of each periodic payment is taken as an interest expense. You only pay off a small piece of the principle amount.

As time goes on, more and more of each payment goes towards your principal (and you pay less in interest each month).

Amortizing a loan usually means establishing a series of equal monthly payments. This will provide the lender with the following:

1. Interest based on each month’s unpaid principal balance, and
2. Principal repayments that will cause the unpaid principal balance to be zero at the end of the loan.

The amount of each monthly payment is identical. The interest component of each payment will be decreasing. The principal component of each payment will be increasing during the life of the loan.

An amortization schedule is a table with a row for each payment period of an amortized loan.

Each row shows the amount of the payment that is needed to pay interest, the amount that is used to reduce principal, and the balance of the loan remaining at the end of the period.

In other words, a schedule which shows repayment broken down by interest and amortization and the loan balance.