Amortization involves spreading out a loan repayment into series of fixed payments over time. You’ll be paying off the loan’s interest and principal in different amounts each month, although your total payment remains equal each period. This most commonly happens with monthly loan payments, but amortization is an accounting term that can apply to other types of balances, such as allocating certain costs over the lifetime of an intangible asset.
With loans, including home loans and auto loans, while each monthly payment remains the same, the payment is made up of parts that change over time. A portion of each payment goes towards –
An amortization schedule is a comprehensive table of periodic loan payments. It comprises of the amount of principal and the amount of interest that is due for each payment until the loan is paid off till the end of its term. While early on each periodic payment is the same amount in the schedule, the majority of each payment is interest; later in the schedule, the majority of each payment covers the principal amount. The last line of the schedule shows the borrower’s balance amount which includes total interest and principal payments for the entire loan term.
In an amortization schedule, the amount going toward principal starts out small, and gradually grows larger month by month. … Your amortization schedule shows how much money you pay in principal and interest over time.
Borrowers and lenders use amortization schedules for installment loans that have payoff dates that are known at the time the loan is taken out, such as a home loan or a car loan. While the actual loan amount is fixed, the amount you pay on a loan in terms of principal and interest is not. That is where a loan amortization schedule comes into play
For example- A loan amount of Rs. 1,000,000.00 with interest rate @8.50%, for a term period of 30 years, paid Monthly, would amount to Rs. 8678 Monthly.
The Amortization Schedule would be-
Loans which cannot be placed for amortization are – home equity loans, revolving debts and credit cards. These types of credit-based loans don’t have fixed monthly payments.
The practice of amortization has lot of advantages and can benefit individuals or business organisation in many ways. The method of splitting up a mortgage or debts can help to schedule the repayment process and thus have a less stressful time. As the repayment is done in terms, there is no need to spend a lot of capital at one go.
A fully amortized loan is always good and can give the borrower or the firm all the benefits, without being an unexpected burden. The borrower should follow the perfect discipline and pay off the interest due within the specified time. Otherwise, he may have to face the problem of negative amortization, making him pay more than what he was supposed to pay.