Introduction to Amortization Schedule
- An amortization schedule is known as a comprehensive table of periodic loan payments, showing the amount of principal and interest that include each payment until the loan is paid off at the end of its term.
- Every periodic payment is the same amount in total for each period.
- However, early in the schedule, most of each payment is owed in interest; later in the schedule, the majority of every payment covers the loan's principal.
- The last line of the schedule reveals the borrower's total interest and principal payments for the complete loan term.
Understanding An Amortization Schedule
- In an amortization schedule, the percentage of any payment that goes toward interest decreases slightly with every payment and the percentage that goes toward principal rises.
- Suppose you are looking to take out a loan, besides using an amortization schedule. In that case, you also can use a mortgage calculator to determine your total mortgage costs based on your specific loan.
Methods For Amortization Schedule
There are various methods to amortize a loan. Different approaches lead to different amortization schedules.
Straight line-The straight-line amortization, also identified as linear amortization, is where the total interest amount is divided equally over the life of a loan. It is a generally used method in accounting due to its simplicity.
Declining balance-The declining-balance method is an expedited method of amortization where the periodic interest payment declines, but the principal repayment grows with the age of the loan.
Annuity-A loan amortized in the annuity method involves a series of payments made in equal time intervals. The payments are also usually made in equal amounts. There are two kinds of annuity: ordinary annuity, for which payments are made at the end of every period, and annuity due, for which payments are made at the start of every period.
Bullet-Bullet loans are not generally amortized over the life of loans. Usually, the periodic payments of a bullet loan incorporate the interest charges only. It leaves a substantial amount of the final payment at the loan's maturity, which repays the entire principal.
Balloon-A balloon loan is somewhat similar to a bullet loan, which normally repays its complete principal at maturity. Occasionally, it is amortized with small amounts of principal repayments but leaves the majority paid at maturity.
Negative amortization-In the negative amortization method, the complete payment period is lesser than the interest charged for that period.
