How is a loan amortization schedule calculated?


There are many types of loans that people take. Whether you get a mortgage to buy a house, a home equity loan to do renovations or access cash, a car loan to buy a vehicle, or a personal loan for a variety of purposes, most loans have two things in mind. Common: They provide a fixed period to pay off the loan and charge you a fixed interest rate over your repayment period.

When you take out a fixed rate loan with a fixed repayment term, you usually receive a loan amortization schedule. This calendar gives you important information about your monthly payment amount and allows you to calculate the total amount of interest you will pay over the course of the loan as well as how quickly you will repay the loan. main balance. By understanding how to calculate a loan amortization schedule, you will be in a better position to consider attractive actions, such as making additional payments to pay off your loan faster.

What is a loan amortization schedule?

A loan amortization schedule gives you the most basic information about your loan and how you are going to pay it back. It usually includes a complete list of all the payments you will need to make during the life of the loan. Each payment on the calendar is broken down according to the portion of the payment that goes towards interest and principal. You will usually also receive the outstanding loan balance after each monthly payment, so that you will be able to see how your total debt will go down as the loan is paid off.

You will also usually get a summary of your loan repayment, either at the bottom of the amortization schedule or in a separate section. The summary will add up all of the interest payments that you have paid during the course of the loan, while also verifying that the total principal payments matches the total outstanding loan amount.

How to calculate a loan amortization schedule if you know your monthly payment

It is relatively easy to produce a loan amortization schedule if you know the amount of the monthly loan payment. From the first month, take the total loan amount and multiply it by the loan interest rate. Then for a loan with monthly repayments, divide the result by 12 to get your monthly interest. Subtract the interest from the total monthly payment, and the remaining amount is what goes towards the principal. For the second month, do the same, except start with the first month’s remaining principal balance rather than the original loan amount. At the end of the loan term, your principal should be zero.

Let’s take a simple example: Suppose you have a mortgage of $ 240,000 over 30 years at an interest rate of 5% with a monthly payment of $ 1,288. In the first month, you would take $ 240,000 and multiply it by 5% to get $ 12,000. Divide that by 12, and you would have $ 1,000 in interest for your first monthly payment. The remaining $ 288 is used to repay the principal.

For the second month, your outstanding principal balance is $ 240,000 less $ 288, or $ 239,712. Multiply that by 5% and divide by 12, and you get a slightly smaller amount – $ 998.80 – for interest. Gradually over the following months, less money will be spent on interest and your principal balance will be reduced more and more quickly. In month 360, you owe only $ 5 in interest and the remaining $ 1,283 pays off the balance in full.

Calculating an amortization schedule if you don’t know your payment

Sometimes when you are considering taking out a loan all you know is how much you want to borrow and what the rate will be. In this case, the first step will be to determine what the monthly payment will be. Then you can follow the above steps to calculate the amortization schedule.

There are several ways to go about it. The easiest way is to use a calculator that lets you enter your loan amount, interest rate, and repayment term. For example, our mortgage calculator will give you a monthly payment on a home loan. You can also use it to calculate payments for other types of loans by simply changing the terms and removing any estimate of house expenses.

If you are a handyman, you can also use an Excel spreadsheet to make the payment. The PMT feature gives you the payout based on the interest rate, number of payments, and loan principal balance. For example, to calculate the monthly payment in the example above, you can set an Excel cell to = PMT (5% / 12,360,240,000). That would give you the figure of $ 1,288 that you saw in this example.

Why an amortization schedule can be useful

There are many ways to use the information in a loan amortization schedule. Knowing the total amount of interest you will pay over the life of a loan is a good incentive to get you to make principal payments sooner. When you make additional payments that reduce the outstanding principal, they also reduce the amount of to come up payments that must go towards interest. This is why just a little extra amount paid can make a huge difference.

To demonstrate, in the example above, let’s say that instead of paying $ 1,288 the first month, you spend an additional $ 300 on capital reduction. You might think the impact would be to save you $ 300 on your final payment, or maybe a little more. But thanks to reduced interest, just an extra $ 300 is enough to keep you from winning the full amount of your last payment. In other words, $ 300 saves you over $ 1,300 later.

Be smart with your loans

Even when your lender gives you a loan amortization schedule, it can be easy to ignore it in the pile of other documents you need to process. But information on an amortization schedule is crucial to understanding the ins and outs of your loan. By knowing how a deadline is calculated, you can determine exactly how useful it can be to pay off your debt as quickly as possible.


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